Question

Problem 2-11 Free Cash Flow (LG2-5)

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 $98 million, had a tax rate of 30 percent, and its depreciation expense was $9 million. Fields and Struthers’ gross fixed assets increased by $64 million from 2017 to 2018. The firm’s current assets increased by $52 million and spontaneous current liabilities increased by $44 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

Calculation of Fields and Struthers’ operating cash flow for 2018
	(In $ Millions)
EBIT	$98.00
Less : Interest	$0.00
Earnings before Tax	$98.00
Less : Tax @ 30%	$29.40
Net Income	$68.60
Add : Depreciation	$9.00
Operating Cash flow for 2018	$77.60
Calculation of Fields and Struthers’ investment in operating capital for 2018
	(In $ Millions)
Increase in Current Assets	$52.00
Less : Increase in Current Liabilities	$44.00
Investment in Operating Capital for 2018	$8.00
Calculation of Fields and Struthers’ free cash flow for 2018
	(In $ Millions)
Operating Cash flow of 2018	$77.60
Less : Investment in Operating Capital in 2018	$8.00
Less : Investment in Fixed Assets in 2018	$64.00
Free Cash flow	$5.60