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You are considering an investment in the FIN340 Company and want to evaluate the firm's free cash flow; From the income statement, you see that FIN340 Company earned an EBIT of $100,000, paid taxes of $21,000, and its depreciation expense was $13,000; FIN340 Company's gross fixed assets increased by $60,000 from 2017 to 2018. The firm's current assets increased by $15,000 and spontaneous current liabilities increased by $19,000 - What is FIN340 Company's free cash flow in 2018

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ayokenny2001

Answer:

FIN340 company cash flow for 2018 is $28,000

Explanation:

Firstly, we will calculate NOPART

NOPART = EBIT ( 1 - Tax rate )

= $100,000 ( 1 - 21% )

= $100,000 ( 1 - 0.21 )

= $79,000

Next to be calculated is Operating cash flow(OCF) for 2018.

OCF = NOPART + depreciation

OCF = $79,000 + $13,000

OCF = $92,000

We will also calculate investment in operating capital(IOC) for 2018.

IOC = Change in gross fixed assets + Change in net operating working capital

= $60,000 + ( $19,000 - $15,000 )

= $60,000 + $4,000

= $64,000

Therefore,

FIN340 company free cash flow(FCF) for 2018 would be ;

FCF = Operating cash flow - Investment in operating capital

FCF = $92,000 - $64,000

FCF = $28,000

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