Question

In 2018, CJH Excavating reported the following information. What is the firm's free cash flow? Dividends are paid out at 31% of earnings for the year. The firm has 50,000 common shares outstanding. The firm's tax rate is 32%.

December 31 Balance Sheet
	2017	2018
Assets
Cash	52000	59000
Short-term Investments	13000	17000
Other Assets	173000	158000
Total Assets	238000	234000
Liabilities & Owners' Equity
Accounts Payable	4760	11700
Notes Payable	30940	23400
Total Current Liabilities	35700	35100
Long Term Debt	80920	79560
Total Liabilities	116620	114660
Common Stock	42840	42120
Retained Earnings	78540	77220
Owners' Equity	121380	119340
Total Liabilities & Owners' Equity	238000	234000
Year-End Income Statement
	2017	2018
Sales		435240.0
Operating Costs
Variable Costs		326430
Fixed Costs		43524
Depreciation		8705
Earnings before Interest and Taxes (EBIT)		56581.0
Interest Expense		15277
Earnings before Taxes (EBT)		41304.0
Taxes (32%)		13217
Net Income (NI)		28087.0
Fill in your answers below:
		2018
Dividends Paid
A-T Interest
Sale of Short Term Investments
Change in Debt
Change in Common Stock
Free Cash Flow

Answer 1

firm's free cash flow = net income + depreciation/non-cash expenses - increase in working capital - capital expenditure

increase in working capital = working capital 2018 - working capital 2017

working capital = current assets - current liabilities

in the above working capital formula, current assets is excluding cash and short-term investments or marketable securities. current assets in the above formula includes only operating current assets.

working capital 2018 = 0 - 35100 = -35100

working capital 2017 = 0 - 35700 = -35700

Increase in working capital = -35100 - (-35700) = -35100 + 35700 = 600

capital expenditure = net fixed assets 2018 + depreciation 2018 - net fixed assets 2017

in the balance sheet, other assets is given. there is depreciation also for 2018. so other assets is net fixed assets in this question.

capital expenditure = 158000 + 8705 - 173000 = -6295

firm's free cash flow = 28087 + 8705 - 600 - (-6295) = 28087 + 8705 - 600 + 6295 = 42487

firm's free cash flow is 42487.