# Finding operating and free cash flows Consider the following balance sheets and selected data...

## Question:

Finding operating and free cash flows Consider the following balance sheets and selected data from the income statement of Keith Corporation.

Keith Corporation Balance Sheets 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% Required a. Calculate the firm's net operating profit after taxes (NOPAT) for the year ended December 31, 2015 b. Calculate the firm?s operating cash flow (OCF) for the year ended December 31, 2015 c. Calculate the firm?s free cash flow (FCF) for the year ended December 31, 2015 d. Interpret, compare, and contrast your cash flow estimates in parts b and c. ## Operating Cash Flow: Pretax operating cash flow refers to the net income generated from the selling of goods and services before the tax, interest and depreciation expenses has been deducted from it. After deducting all the other expenses from the operating cash flow, net income is calculated. ## Answer and Explanation: Given data: Depreciation expense =$1,600

Earnings before interest and taxes = $2,700 Interest expense =$367

Net profits after taxes = 1,400

Tax rate = 40%

Net fixed assets (2015) = $14,800 Net fixed assets (2014) =$15,000

Total current assets (2015) = $8,200 Total current assets (2014) =$6,800

Accruals (2015) = 200

Accruals (2014) = 300

Accounts payable (2015) = $1,600 Accounts payable (2014) =$1,500

Finding:

a.

Net operating profit after taxes = Earnings before interest and taxes * (1 - Tax rate)

Net operating profit after taxes = 2,700 * (1 - 40%)

Net operating profit after taxes = 2,700 * (1 - 0.40)

Net operating profit after taxes = 2,700 * 0.6

Net operating profit after taxes = $1,620 b. Operating cash flow = Net operating profit after taxes + Depreciation expense Operating cash flow = 1,620 + 1,600 Operating cash flow =$3,220

c.

Net fixed asset investment = (Net fixed assets (2015) - Net fixed assets (2014)) + Depreciation expense

Net fixed asset investment = (14,800 - 15,000) + 1,600

Net fixed asset investment = -200 + 1,600

Net fixed asset investment = $1,400 Net current asset investment = (Total current assets (2015) - Total current assets (2014)) - ((Accounts payable (2015) - Accounts payable (2014)) - (Accruals (2015) - Accruals (2014))) Net current asset investment = (8,200 - 6,800) - ((1,600 - 1,500) + (200 - 300)) Net current asset investment = 1,400 - (100 - 100) Net current asset investment =$1,400

Free cash flow = Operating cash flow - Net fixed asset investment - Net current asset investment

Free cash flow = 3,220 - 1,400 - 1,400

Free cash flow = \$420

d.

OCF is more value than FCF.

However FCF is more valuable as it covers both fixed investments and Net working capital investment. 