Question

Use the following balance sheets and income statement to answer this question

Tully Corp (all in $ Million)	2018	2019		LIABILITIES AND EQUITY	2018	2019
Current assets:				Accounts payable	540.0	398.1
Cash and cash equivalents	1,148.1	1,188.6		Accrued liabilities	1,086.5	1,301.5
Short-term investments	902.6	848.4		Deferred revenue	449.3	510.2
Accounts receivable, net	386.5	485.9		Long-term debt	549.5	549.6
Inventories	965.8	1,241.5		Other long-term financing liabilities	347.8	345.3
Prepaid expenses	391.9	435.2		Total liabilities	2,973.1	3,104.7
Total current assets	3,794.9	4,199.6		Common stock par value	0.7	0.7
Long-term investments securities	479.3	575.9		Additional paid-in capital	40.5	40.5
Property, plant and equipment, net	2,355.0	2,658.9		Retained earnings	4,297.4	5,046.2
Other operating assets	731.2	784.8		Other equity interests	48.4	27.1
TOTAL ASSETS	7,360.4	8,219.2		Total shareholders' equity	4,387.0	5,114.5
				Non-controlling interests	2.4	5.5
Tully Corp (in $ Million)	2018	2019		Total equity	4,387.3	5,114.5
Total net revenue	11,700.4	13,299.5		TOTAL LIABILITIES AND EQUITY	7,360.4	8,219.2
Cost of sales	4,915.5	5,813.3
Store and operating expense	3,987.7	4,348.0
Depreciation expense	523.3	550.3
General administrative expense	749.3	801.2
Other operating income	203.9	210.7
Operating income	1,728.5	1,997.4
Interest income	115.9	94.4
Interest expense	-33.3	-32.7
Earnings before income tax	1,811.1	2,059.1
Income taxes	563.1	674.4
Net earnings	1,248.0	1,384.7
Total dividend payment	419.1	635.9
Shares outstanding	748.3	754.4

Calculate the firm’s free-cash-flow (FCF) for Tully during 2019 and carefully interpret the meaning of free cash flow that you calculated to the firm's investors.

Answer 1

INCOME TAX Rate

Income Tax Expense / Net Earnings*100

=674.4/2059.1*100

=32.75%

Calculation of Firm's Free cash flow during 2019

	Particulars	Amount ($ Mlln)
	Revenue	13,299.50
Less	Cost of sales	5,813.30
Less	Store and operating expense	4,348.00
Less	Depreciation expense	550.30
Less	General administrative expense	801.20
Add	Other operating income	210.70
	Operating income/EBIT	1,997.40
Less	Income taxes @32.75%	654.15
	Net Profit After Taxes /EBIT (1-T)	1,343.25
Add	Depreciation expense	550.30
	Gross Cash Flows	1,893.55
Less	Investment in Capital Assets(WN 1)	854.20
Less	Investment in Operating Assets (784.8-731.2)	53.60
Less	Investment in Working Capital (WN 2)	324.90
	Free Cash Flows	660.85

Working Note 1:

	Investment in Capital Assets i.e. Property, plant and equipment
	Particulars	Amount ($ Mlln)
	Opening Balance 2019	2,355.00
Add	Investment during the year	854.20
Less	Depreciation expense	-550.3
	Closing Balance 2019	2,658.90

Working Note 2:

Free Cash flow to firms means the cash a company produces through its operations, less the cost of expenditures on capital assets and Working Capital Changes. Since it is operating cash flow - (capital expense+ working Capital Change ). Working Capital determined is operating Wokring Capital and hence Short term investment has excluded from current assets by considering them as non- operating assets .

Investment in Working Capital (WN 2) i.e. Change in Working Capital
Particulars	Amt ($ Mlln)	Amt ($ Mlln)	Amt ($ Mlln )
	2018	2019	Change
Current Assets
Cash and cash equivalents	1,148.10	1,188.60	40.50
Accounts receivable, net	386.5	485.9	99.40
Inventories	965.8	1,241.50	275.70
Prepaid expenses	391.9	435.2	43.30
Total current assets (A)	2,892.30	3,351.20	458.90
Current Liabilities
Accounts payable	540	398.1	-141.9
Accrued liabilities	1,086.50	1,301.50	215
Deferred revenue	449.3	510.2	60.9
Total Current Liabilities (B)	2075.8	2209.8	134
Working Capital (A-B)	816.50	1,141.40	324.90

Meaning of Firm's Free Cash Flow to investors:

Firm's Free cash flow is the cash flows available to all investors in the companyi.e. both shareholders and bondholders through the operations of company   after considerations of taxes, capital expenditures and working capital investments

Here Firms' Cash Flow is $660.85 Million. it means tully corp has large amount of freee cashflows which can be used to pay interest , dividends and expand the operation. Firm can also used cashflow to repay the long term finance laibilities or long term debt and thereby deleverage it.