Question

The 2015 income statement for Duffy’s Pest Control shows that depreciation expense was $207 million, EBIT...

The 2015 income statement for Duffy’s Pest Control shows that depreciation expense was $207 million, EBIT was $524 million, and the tax rate was 35 percent. At the beginning of the year, the balance of gross fixed assets was $1,594 million and net operating working capital was $427 million. At the end of the year, gross fixed assets was $1,851 million. Duffy’s free cash flow for the year was $437 million.
Calculate the end-of-year balance for net operating working capital. (Enter your answer in millions of dollars rounded to 1 decimal place.)


  Net operating working capital $  m
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Answer #1

End-of-year balance for net operating working capital = $280.60 Million

Workings

Operating cash flow

Operating cash flow = EBIT (1 – Tax rate) + Depreciation

= [ $524 Million (1 – 0.35) + $207 Million ]

= $ 547.60 Million

Free Cash Flow

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

$437 Million = $547.60 Million - Investment in operating capital

Investment in operating capital = $547.60 Million - $437 Million

= $110.60 Million

Investment in operating capital

Investment in operating capital = Changes in Gross fixed assets + Changes in Net operating working capital

$110.60 Million = ($1,851 Million – 1,594 Million) + (Ending net operating working capital – $427 Million)

$110.60 Million = $257 Million + Ending net operating working capital – $427 Million

Ending net operating working capital = $110.60 – 257 + 427 = $280.60 Million

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