Question

Free Cash Flow You are considering an investment in Crew Cut, Inc. and want to evaluate the firm's free cash flow. From the income statement, you see that Crew Cut earned an EBIT of $23.15 million, paid taxes of $3.85 million, and its depreciation expense was $7.85 million. Crew Cut's gross fixed assets increased by $10.15 million from 2007 to 2008. The firm's current assets increased by $6.15 million and spontaneous current liabilities increased by $3.85 million. What is Crew Cut's operating cash flow, investment in operating capital and free cash flow for 2008, respectively in millions?

Answer 1

The Free Cash flow calculation has been made below:

	(in $ million)
EBIT	23.15
-Taxes	-3.85
Profit after tax	19.3
Add back depreciation	7.85
Operating Cash Flows (A)	27.15
Increase in fixed assets	10.15
Rise in Current Assets	6.15
-Rise in current liabilities	-3.85
Increase in Operating Capital (B)	12.45
Free Cash Flow (Operating Cash flows minus Increase in operating capital or A-B)	14.7

Note that depreciation has been added back to obtain operating cash flows, this is because depreciation is a non cash expendituyre.

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