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 EBIT of $88 million, had a tax rate of 30 percent, and its depreciation expense was $12 million. Fields and Struthers' gross fixed assets increased by $54 million from 2011 to 2012. The firm's current assets increased by $42 million and spontaneous current liabilities increased by $34 million.
Calculate Fields and Struthers' operating cash flow for 2012.
Calculate Fields and Struthers' investment in operating capital for 2012.
Calculate Fields and Struthers' free cash flow for 2012.
Operating Cash Flow:
Operating cash flow is calculated by preparing the cash flow statement. It is calculated by adding any non-cash expenses to the net income and deducting any change in the working capital.
Answer and Explanation:
EBIT = $88,000,000
Tax rate = 30%
Depreciation expense = $12,000,000
Fixed assets increased = $54,000,000
Current assets increased = $42,000,000
Current liabilities increased = $34,000,000
Fields and Struthers' operating cash flow for 2012 is evaluated as follow:
Operating cash flow = EBIT + Depreciation expense - (EBIT * Tax rate)
Operating cash flow = 88,000,000 + 12,000,000 - (88,000,000 * 30%)
Operating cash flow = 100,000,000 - 26,400,000
Operating cash flow = $73,600,000
Fields and Struthers' investment in operating capital for 2012 is evaluated as follow:
Investment in operating capital = Fixed assets increased + Current assets increased - Current liabilities increased
Investment in operating capital = 54,000,000 + 42,000,000 - 34,000,000
Investment in operating capital = 54,000,000 + 8,000,000
Investment in operating capital = $62,000,000
Fields and Struthers' free cash flow for 2012 is evaluated as follow:
Free cash flow = Operating cash flow - Investment in operating capital
Free cash flow = 73,600,000 - 62,000,000
Free cash flow = $11,600,000
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from Finance 101: Principles of FinanceChapter 10 / Lesson 4