Select information from BOINKE Corporation's financial statements is provided here.
|Balance sheet as of december 31||2014||2013|
|New Plant and Equipment||1,120,000||1,080,000|
|long - term Bonds||416,000||345,600|
|Total Common Equity||944,000||864,000|
|Total Liabilities and Equity||1,600,000||1,440,000|
|Earnings before interest and taxes||480,000|
|Depreciation and amortization||56,000|
|Number of shares outstandiing||32,000|
|Price per share||$22.13|
What was 2014 free cash flow?
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|
|Less: 40% taxes||(192,000)|
|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.
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from Finance 101: Principles of FinanceChapter 10 / Lesson 4