You are working on your second project as an equity research intern at a bulge i

Question

You are working on your second project as an equity research intern at a bulge investment bank. Your focus is in retail space, especially in the health and fitness sector. Currently, you are gathering information on a fast-growing chain fitness company called LuluYoga. You are interested in calculating the free cash flow of the firm.

LuluYoga offers yoga classes in several major cities in the United States. Two major revenue resources are selling workout gear and membership passes for class access.

Assume at the beginning of year 2016, LuluYoga has zero inventory.

In year 2016, LuluYoga purchased 10,000 yoga mats at a price of $10 each. The company sells 6,000 mats at a price of $15 in year 2016 and sells the remaining at a price of $20 in year 2017.

In year 2016, LuluYoga sells 1,000 membership passes for $2,000 each. 80% of the classes purchased were used in 2016 and the rest are used in 2017.The yoga master’s compensation to teach classes are $300K in year 2016 and $200K in year 2017.

LuluYoga pays corporate tax of 35%.

Q6. What is the FCF of LuluYoga in year 2016 and 2017?

Explanation / Answer

Given -

2016 :

1. Purchase of 10,000 yoga mats @ $10 each = 10,000 x $10 = $100,000

2. Sold 6,000 yoga mats @ $15 each = 6,000 x $15 = $90,000

3. 80% of membership passes (1,000 x 80% = 800) were sold @ $2,000 each = 800 x $2,000 = $1,600,000

4. Yoga master's compensation = $300,000

2017 :

1. Sold 4,000 yoga mats @ $15 each = 4,000 x $15 = $60,000

2. 20% of membership passes (1,000 x 20% = 200) were sold @ $2,000 each = 200 x $2,000 = $400,000

3. Yoga master's compensation = $200,000

Corporate Tax = 35%

To Find :

Free Cash Flow (FCF) of LulaYoga in year 2016 and 2017

Formula :

FCF = Earnings Before Interest and Taxes - Interest - Taxes paid

Calculation :

Following table shows the calculation for LuluYoga in the year 2016 and 2017 -

*Yoga mats were purchased in the year 2016 so considered as expense of 2016 and not of 2017. So, it is $0 in 2017.

Answer :

FCF of LuluYoga in year 2016 is $1,228,500 and in year 2017 is $429,000.

Particulars 2016 (in $) 2017 (in $) Revenue - Sale of yoga mats 90,000 60,000 Membership passes 1,600,000 400,000 Yoga master's compensation 300,000 200,000 Total Revenue (A) 1,990,000 660,000 Expenses - Purchase of yoga mats 100,000 0* Total Expenses (B) 100,000 0 Earnings Before Interest and Taxes (C = A - B) 1,890,000 660,000 Less : Interest 0 0 Earnings Before Taxes (D) 1,890,000 660,000 Less : Tax @ 35% of D (E) 661,500 231,000 Earnings after Tax (Free Cash Flow - FCF) (F = D - E) 1,228,500 429,000

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