You are considering an investment in Cruise, Inc. and want to evaluate the firm\

Question

You are considering an investment in Cruise, Inc. and want to evaluate the firm's free cash flow. From the income statement, you see that Cruise earned an EBIT of $202 million, paid taxes of $51 million, and its depreciation expense was $75 million. Cruise's gross fixed assets increased by $70 million from 2012 to 2013. The firm's current assets decreased by $10 million and spontaneous current liabilities increased by $6 million. What is Cruise's operating cash flow, investment in operating capital, and free cash flow for 2013, respectively, in millions?

Explanation / Answer

Fields and Struthers’ operating cash flow was:

OCF = EBIT – Taxes + Depreciation

= ($202m. – $51m + $75m) = $226m

Investment in operating capital for 2008 was:

IOC = Gross fixed assets + Net operating working capital

= $70m. + (- $10m. - $6m.) = $54 m.

Accordingly, Fields and Struthers’ free cash flow for 2008 was:

FCF = Operating cash flow – Investment in operating capital

= $226m. - $54m. = $172m.

In other words, in 2008, Fields and Struthers had cash flows of $172 million available to pay its stockholders and debtholders.

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