Question

The 2015 income statement for Duffy’s Pest Control shows that depreciation expense was $202 million, EBIT was $514 million, and the tax rate was 30 percent. At the beginning of the year, the balance of gross fixed assets was $1,584 million and net operating working capital was $422 million. At the end of the year, gross fixed assets was $1,836 million. Duffy’s free cash flow for the year was $427 million.

Calculate the end-of-year balance for net operating working capital. (Enter your answer in millions of dollars rounded to 1 decimal place.)

Answer 1

Hello

End-of-year balance of net working capital = $304.8m

Free Cash Flows to the firm = EBIT(1-tax) + Depreciation & Amortization - Net Changes in Working Capital - Capital Expenditure

Now,

Free Cash Flows to the firm = $427m

Capital Expenditure = Closing Fixed Assets - Opening Fixed Assets + Depreciation = 1,836m - $1,584 = $252m [Depreciation not considered because gross amount of fixed assets' balance is given instead of net, hence it is free from effect of depreciation.]

EBIT(1-tax) + Depreciation = $514m(1-0.3) + $202m = $561.8m

Opening Net Working Capital = $422m.

Let Closing Net Working Capital = $Xm

Hence, using

{Free Cash Flows to the firm = EBIT(1-tax) + Depreciation & Amortization - Net Changes in Working Capital - Capital Expenditure}

$427m = $561.8m - ($Xm - $422m) - $252m

Hence, X = 304.8

I hope this solves your query.

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