Finding operating and free cash flows Consider the following balance sheets and
ID: 2447926 • Letter: F
Question
Finding operating and free cash flows Consider the following balance sheets and selected data from the income statement of Keith Corporation December 31
Assets 2015 2014
Cash $ 1,500 $ 1,000
Marketable securities 1,800 1,200
Accounts receivable 2,000 1,800
Inventories 2,900 2,800
Total current assets $ 8,200 $ 6,800
Gross fixed assets $29,500 $28,100
Less: Accumulated depreciation 14,700 13,100
Net fixed assets $14,800 $15,000
Total assets $23,000 $21,800
Liabilities and stockholders’ equity
Accounts payable $ 1,600 $ 1,500
Notes payable 2,800 2,200
Accruals 200 300
Total current liabilities $ 4,600 $ 4,000
Long-term debt 5,000 5,000
Total liabilities $ 9,600 $ 9,000
Common stock $10,000 $10,000
Retained earnings 3,400 2,800
Total stockholders’ equity $13,400 $12,800
Total liabilities and stockholders’ equity - $23,000 $21,800
KEITH CORPORATION INCOME STATEMENT DATA (2015)
Depreciation expense $1,600
Earnings before interest and taxes (EBIT) 2,700
Interest expense 367
Net profits after taxes 1,400
Tax rate 40%
Calculate the firm’s net operating profit after taxes (NOPAT) for the year ended
December 31, 2015, using Equation 4.1.
b. Calculate the firm’s operating cash flow (OCF) for the year ended December 31,
2015, using Equation 4.3.
c. Calculate the firm’s free cash flow (FCF) for the year ended December 31, 2015,
using Equation 4.4.
d. Interpret, compare, and contrast your cash flow estimates in parts b and c.
Explanation / Answer
Cash Flow Amt $ 1 EBIT 2,700 2 Add Depreciation 1,600 3 Less interest paid (367) 4 Tax paid (933) 5 Increase in Current Asset (900) 6 Increase In Current Liab 600 Ans b 7 Net Cash Flow from Opearing Activites 2,700 8 Investment in Fixed asset Fixed asset investment (1,400) Cash Flow from Investing (1,400) 9 Dividends paid (800) Cash Flow from financing activities (800) Total effect of opearting, Inveting and financing activities 500 Opening Cash 1,000 Add change in net cash 500 Closing Cash 1,500 Ans c. Free cash Flow = opearing cash flow remaining after investing in assets = Operating cash flow- cash flow from investing =2700-1400 =1300 Ans d. The investing activities require 50% of the opearting cash flow which is an indication that the firm can meet its capital requirement from internal sources and do not need external borrowing.
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