Question

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 $60 million, had a tax rate of 34 percent, and its depreciation expense was $4 million. Fields and Struthers’ gross fixed assets increased by $30 million from 2017 to 2018. The firm’s current assets increased by $22 million and spontaneous current liabilities increased by $13 million.

Calculate Fields and Struthers’ operating cash flow for 2018. (Enter your answer in millions of dollars rounded to 1 decimal place.)

Calculate Fields and Struthers’ investment in operating capital for 2018. (Enter your answer in millions of dollars.)

Calculate Fields and Struthers’ free cash flow for 2018. (Enter your answer in millions of dollars rounded to 1 decimal place.)

Answer 1

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ANSWER:

Operating Cash Flow = EBIT – Taxes + Depreciation

Operating Cash Flow = ($60m. – $20.4m + $4m) = $43.6m

Investment in Operating Capital = Change in Gross fixed assets + Change in Net operating working capital

Investment in Operating Capital = $30m. + ($22m. - $13m.) = $39 m.

Free Cash Flow = Operating cash flow – Investment in operating capital

Free Cash Flow = $43.6m. - $39m. = $4.6m.