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Quantitative Problem: Rosnan Industries' 2019 and 2018 balance sheets and income statements are shown below. Balance...

Quantitative Problem: Rosnan Industries' 2019 and 2018 balance sheets and income statements are shown below.

Balance Sheets
Assets 2019 2018
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  
Liabilities and Equity
Accounts payable $150   $85  
Accruals 75   50  
Notes payable 150   75  
      Total current liabilities $375   $210  
Long-term debt 450   290  
      Total liabilities 825   500  
Common stock 1,225   1,225  
Retained earnings 1,000   400  
Common equity 2,225   1,625  
Total liabilities and equity $3,050   $2,125  


Income Statements
2019 2018
Sales $2,035   $1,585  
Operating costs excluding depreciation and amortization 1,250   1,000  
EBITDA $785   $585  
Depreciation and amortization 100   75  
EBIT $685   $510  
Interest 63   46  
EBT $622   $464  
Taxes (25%) 156   116  
Net income $467   $348  
Dividends paid $54   $48  
Addition to retained earnings $600   $300  
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 2019 free cash flow (FCF)? Use a minus sign to indicate a negative FCF. Round your answer to the nearest cent.

$  

Solutions

Expert Solution

Solution;-

Computation of Free Cash Flow

Particulars Amount
Net Income 677
Add: Interest Expenses 63
Less: Tax shield on interest expenses ( 63x 25%) 15.75
Add: Depreciation 100
Less : Capital expenditure 910
Less:Change in net operating working capital 25
Free cash flow -110.75

Free Cash Flow = -110.75

Explanation:

Computation of Net Working Capital

Particulars 2018 2019
Current Assets 635 750
Current Liabilities -  Notes Payable 135 ( 210-75) 225(375-150)
Net operating working capital $ 500 $ 525

Net operating working capital = Current asstes - (Current liabilities - Notes payable)

Change in net operating working capital = 525 -500 =$ 25

Computation of Capital Expenditure

Particulars Amount
Net Fixed assets in 2019 2300
Add: Depreciation for 2019 100
Less:Net Fixed assets in 2018 1490
Capital expenditure $ 910

jeff jeffy answered 2 years ago
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