Question

Calculate the free cash flow generated by a firm which has earnings before interest and taxes of £30m, has depreciated its fixed assets by £1m, has invested £10m in new fixed assets and £5m in working capital during 2019 when it paid corporate tax at 20%. Explain what you have assumed about the firm’s asset base.

Answer 1

Free cash flow = [EBIT * (1-Tax)] + Depreciation - Fixed asset investement - Working capital adjustment

Free cash flow = [30 * (1-20%)] + 1 - 10 - 5

Free cash flow = 24 + 1 - 10 -5

FCF = 15 million

I have assumed that the depreciation of 1 million charged includes the depreciation on the new purchase worth of 10 million. Alternatively, one can assume that the investment of 10 million is made at the last day of the year and hence no depreciation charge is required on the same.