Question

A corporation reported the following information for years ending 12-31-2008 and 12-31-2007. Use this information to compute free cash flow for the year ended 12-31-2008: DO NOT SHOW DOLLAR SIGNS OR COMMAS. IF YOUR ANSWER IS NEGATIVE PUT A MINUS SIGN IN FRONT OF YOU ANSWER.

  12-31-2008      12-31-2007

CASH $2,000 $800

ACCTS RECEIVABLE $900          $700

INVENTORY $1,500 $1,800

            

NET PLANT/EQUIP $10,000 $7,000

            

ACCOUNTS PAYABLE $700 $500

            

ACCRUED WAGES $600 $500

            

EBIT $2,000 $1,000

            

DEPRECIATION $100 $80

MTB                                                   40% 40%

Answer 1

- Net Operating Working Capital = (Cash + Accounst receivables + Inventory) - (Accounts Payable + Accurals)

Net Operating Working Capital of 2008 = ($2000 + $900 + $1500) - ($700 + $600)

= $3100

Net Operating Working Capital of of 2007 =($800 + $700 + $1800) - ($500 + $500)

= $2300

- Free cash Flow = EBIT*(1-Tax rate) + Depreciation - Change in Net Operating Working Capital - Net Capital Spending

where, Change in Net Operating Working Capital = Net Operating Working Capital of 2008 - Net Operating Working Capital of 2007

= $3100 - $2300 = $800

- Net Capital Spending of 2008 = Net Plant & Equipment of 2008 + depreciation of 2008 - Net Plant & Equipment of 2007

=$10,000 + $100 - $7000 = $3100

Free cash Flow of year-ending 2008 =$2000*(1-0.40) + $100 - $800 - $3100

Free cash Flow = -$2600

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