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Select information from BOINKE Corporation's financial statements is provided here. What was 2014...

Question:

Select information from BOINKE Corporation's financial statements is provided here.

Balance sheet as of december 31 2014 2013
Current Assets 480,000 360,000
New Plant and Equipment 1,120,000 1,080,000
Total Assets 1,600,000 1,440,000
Accounts payable 80,000 86,400
Notes payable 112,000 43,200
Accruals 48,000 100,800
long - term Bonds 416,000 345,600
Total Common Equity 944,000 864,000
Total Liabilities and Equity 1,600,000 1,440,000
Income Statement 2,014
Earnings before interest and taxes 480,000
Depreciation and amortization 56,000
Interest 41,600
Taxes 40% 175,360
Net income 263,040
Other Information 2,014
WACC 13.20%
Number of shares outstandiing 32,000
Price per share $22.13

What was 2014 free cash flow?

$68,800
$137,600
$12,800
$124,800

Free Cash Flow:

The formula for Free Cash Flow (FCF) is Cash Flow from Operations minus the Capital Expenditures. FCF represents the amount of cash generated by a business after accounting for its reinvestment in fixed assets.

Answer and Explanation:

Free Cash Flow is defined as cash flow from operations minus capital expenditures. So, we must first calculate BOINKE's operating cash flow, by taking EBIT, then subtracting 40% for taxes, and then add back the depreciation. Next, we add or subtract the appropriate changes in Current Assets or Current Liabilities (sources of cash being decreases in assets and increases in liabilities and the uses of cash being increases in assets and decreases in liabilities). Therefore, Operating Cash Flow was the following in 2014:

Cash Flow from Operations
EBIT 480,000
Less: 40% taxes (192,000)
Add: Depreciation 56,000
Increase in current assets (120,000)
Decrease in accounts payable (6,400)
Increase in notes payable 68,800
Decrease in accrued expenses (52,800)
Net Cash from Operations 233,600

To calculate capital expenditures in 2014, first take the beginning Plant & Equipment of $1,080,000, then subtract Depreciation of $56,000 to get $1,024,000.

(Note: we assume that the "Depreciation & Amortization" listed in the Income Statement is strictly Depreciation, with no Amortization.)

Since the ending P&E was $1,120,000, the difference is the capital expenditure for the year,

$1,120,000 - 1,024,000 = $96,000.

Therefore, the Free Cash Flow is: $233,600 - $96,000 = $137,600.


Learn more about this topic:

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Operating Cash Flow: Definition & Examples

from Finance 101: Principles of Finance

Chapter 10 / Lesson 4
11K

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