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Local Inc. recently reported $185,250 of sales, $140,500 of operating costs other than depreciation, and $9,250...

Local Inc. recently reported $185,250 of sales, $140,500 of operating costs other than depreciation, and $9,250 of depreciation.
The company had $35,250 of debt that carry a 6.75% interest rate, and its federal-plus-state income tax rate was 40%.
In order to sustain its operations and thus generate future sales and cash flows, the firm was required to spend $15,250 to buy new fixed
assets and to invest $6,850 in net operating working capital.
(a) What was the firm's free cash flow?
(b) Analyze the company's FCF. (This analysis is specific to Local Inc, and does not require you to define FCF).

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Answer #1

a. FCF=EBIT*(1-tax rate)+depreciation-Investment in fixed assets-working capital investment

EBIT=Sales-Operating costs=$185,250-$140,500=$44,750

FCF=$44750*(1-40%)+$9,250-$15,250-$6,850=$14,000

b. FCF tells that whether company is able to generate the cashflows to meet their investment needs. Here the investment needs are aasets building and working capital requirement. if comapny unable to generate cashflows to meet these investment needs, Local inc has to borrow from the lenders/investors. In this case, Local Inc is able to generate the cashflows to meet these investment requirements, hence cashflow wise, company is in strong position to fund from its own cash.

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