Question
Free Cash Flow The focus on traditional financial statements is -Select-marketaccountingreplacementItem 1 data rather than cash flow. However, cash flow is important to investors, managers,
Free Cash Flow
The focus on traditional financial statements is -Select-marketaccountingreplacementItem 1 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) + Depreciation and amortization] - [Capital expenditures + ?Net operating working capital]
-Select-NetFreeOperatingItem 2 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-operating working capitalnet working capitallong-term debtItem 3 . A negative FCF means that the company does not have sufficient -Select-externalinternalItem 4 funds to finance its investments in fixed assets and working capital, and that it will have to raise new money in the -Select-spotcapitalexchangeItem 5 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 companieswith large capital investments.
Quantitative Problem: Rosnan Industries' 2013 and 2012 balance sheets and income statements are shown below.
Balance Sheets: | |||
2013 | 2012 | ||
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 | |
Accounts payable | $150 | $85 | |
Accruals | 75 | 50 | |
Notes payable | 150 | 75 | |
Total current liabilities | $375 | $210 | |
Long-term debt | 450 | 290 | |
Common stock | 1,225 | 1,225 | |
Retained earnings | 1,000 | 400 | |
Total liabilities and equity | $3,050 | $2,125 |
Income Statements: | |||
2013 | 2012 | ||
Sales | $2,200 | $1,200 | |
Operating costs excluding depreciation | 1,250 | 1,000 | |
EBITDA | $950 | $200 | |
Depreciation and amortization | 100 | 75 | |
EBIT | $850 | $125 | |
Interest | 62 | 45 | |
EBT | $788 | $80 | |
Taxes (40%) | 315 | 32 | |
Net income | $473 | $48 | |
Dividends paid | $53 | $48 | |
Addition to retained earnings | $600 | $0 | |
Shares outstanding | 100 | 100 | |
Price | $25.00 | $22.50 | |
WACC | 10.00% |
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 2013 free cash flow (FCF)? Use a minus sign to indicate a negative FCF. $
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