Accounting for Financial Management: Free Cash Flow

The focus on traditional financial statements is

accounting

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$(1-$T$)-$ Net Investment in Operating Capital

Free

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

net operating working capital

$.$ A negative FCF means that the company does not have sufficient

internal

funds to finance its investments in fixed assets and working capital, and that it will have to raise new money in the

capital

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:

$20182017$

Assets

Cash and equivalents $$100$ $$85$

Accounts receivable $275300$

Inventories $375250$

Total current assets $$750$ $$635$

Net plant and equipment $2,3001,490$

Total assets $$3,050$ $$2,125$

Liabilities and Equity

Accounts payable $$150$ $$85$

Accruals $7550$

Notes payable $15075$

Total current liabilities $$375$ $$210$

Long$-$term debt $450290$

Total liabilities $$825$ $$500$

Common stock $1,2251,225$

Retained earnings $1,000400$

Total common equity $$2,225$ $$1,625$

Total liabilities and equity $$3,050$ $$2,125$

Income Statements:

$20182017$

Sales $$2,700$ $$1,700$

Operating costs excluding depreciation $1,2501,000$

EBITDA $$1,450$ $$700$

Depreciation and amortization $10075$

EBIT $$1,350$ $$625$

Interest $6245$

EBT $$1,288$ $$580$

Taxes $(40\%)515232$

Net income $$773$ $$348$

Dividends paid $$53$ $$48$

Addition to retained earnings $$600$ $$300$

Shares outstanding $100100$

Price $$25\mathrm{.}00$ $$22\mathrm{.}50$

WACC $10\mathrm{.}00\%$

The balance in the firm's cash and equivalents account is needed for operations and is not considered "excess" cash.

Using the financial statements 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.

$