Accounting for Financial Management: Free Cash Flow 1 The focus on traditional financial statements is Select data rather than cash flow. However, cash flow is important to investors, managers, and stock analysts. Therefore, decision makers and security analysts need to modify financial statement data provided to them. An important modification is the concept of free cash flow (FCF). Many analysts regard FCF as being the single and most important number that can be developed from the income statements, even more important than net Income. The equation for free cash flow is: FCF - EBIT(1-7) - Net Investment in Operating Capital -Select- cash flow is the cash flow actually available for payments to all investors (stockholders and debtholders) after the company has made investments in fixed assets, new products, and select A negative FCF means that the company does not have sufficient Select funds to finance its investments in fixed assets and working capital, and that it will have to raise new money in the Select markets to pay for these investments. Negative FCF is not always bad. If FCF is negative because after-tax operating income is negative this is bad, because the company is probably experiencing operating problems. Exceptions to this might be startup companies, companies incurring significant expenses to launch a new product line, and high-growth companies with large capital investments. Quantitative Problem: Rosnan Industries' 2018 and 2017 balance sheets and income statements are shown below. Balance Sheets: 2018 2017 Assets Cash and equivalents $100 $85 Accounts receivable 275 300 Inventories 375 250 Total current assets $750 $635 Net plant and equipment 2,300 1,490 Total assets $3,050 $2,125 $150 $85 50 75 150 75 Liabilities and Equity Accounts payable Accruals Notes payable Total current liabilities Long-term debt Total liabilities Common stock Retained earnings Total common equity Total liabilities and equity, $375 450 $210 290 $500 $825 1,225 1,000 $2,225 $3,050 1,225 400 $1,625 $2,125 Income Statements: 2017 Sales Operating costs excluding depreciation EBITDA Depreciation and amortization EBIT Interest EBT Taxes (40%) Net income 2018 $2,600 1,250 $1,350 100 $1,250 62 $1,188 475 $713 $1,400 1,000 $400 75 $325 45 $280 112 $168 Dividends paid Addition to retained earnings $53 $600 $48 $120 Shares outstanding Price WACC 100 $25.00 10.00% 100 $22.50 The balance in the firm's cash and equivalents account is needed for operations and is not considered "excess" cash. Using the financial staterents given above, what is Rosnan's 2018 free cash flow (FCF)? Cash outflow, if any, should be indicated by a minus sign. Round your answer to the nearest dollar