Question

# The 2015 income statement for Duffy’s Pest Control shows that depreciation expense was \$193 million, EBIT...

The 2015 income statement for Duffy’s Pest Control shows that depreciation expense was \$193 million, EBIT was \$496 million, and the tax rate was 35 percent. At the beginning of the year, the balance of gross fixed assets was \$1,566 million and net operating working capital was \$413 million. At the end of the year, gross fixed assets was \$1,809 million. Duffy’s free cash flow for the year was \$409 million.

Solution :-

Duffy's operating cash flow = EBIT(1-Tax) + Dep =

= \$496(1-0.35) + \$193 = \$515.4

Duffy's free cash flow = operating cash flow - investment in operating capital

\$409 = \$515.4 - investment in operating capital

Investment in operating capital = 515.4 - 409 = \$106.4

Investment in operating capital = ( Closing fixed assets - Opening fixed assets ) + ( Closing NOWC - Opening NOWC )

106.4 = ( 1809 - 1566 ) + ( Closing NOWC - 413 )

Therefore Closing NOWC = \$276.4

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