You are considering an investment in fields and Struthers, Inc. and want to eval
ID: 2813494 • Letter: Y
Question
You are considering an investment in fields and Struthers, Inc. and want to evaluate the firm's free cash flow. From the income statement, you see that Fields and Struthers earned an EPIT Of $72 million, had a tax rate of 30 percent, and its depreciation expense was $8 million. Fields and Struthers' gross fixed assets increased by $38 million from 2017 to 2018. The firm current assets increased by $34 million and spontaneous current liabilities increased by $19 million. ( Enter your answers in millions of dollars and rounded to 1 decimal place) .
a. calculate Operating Cash flow for 2018.
b. Calculate investment in operating capital for 2018.
c. Calculate the free cash flow for 2018.
Explanation / Answer
Answer a.
Operating Cash Flow = EBIT * (1 - tax) + Depreciation
Operating Cash Flow = $72 million * (1 - 0.30) + $8 million
Operating Cash Flow = $50.4 million + $8 million
Operating Cash Flow = $58.4 million
Answer b.
Change in Net Working Capital = Increase in Current Assets - Increase in Current Liabilities
Change in Net Working Capital = $34 million - $19 million
Change in Net Working Capital = $15 million
Investment in Operating Capital = Change in Gross Fixed Assets + Change in Net Working Capital
Investment in Operating Capital = $38 million + $15 million
Investment in Operating Capital = $53 million
Answer c.
Free Cash Flow = Operating Cash Flow - Investment in Operating Capital
Free Cash Flow = $58.4 million - $53 million
Free Cash Flow = $5.4 million
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