You are considering an investment in Firm A and want to evaluate the firms free

Question

You are considering an investment in Firm A and want to evaluate the firms free cash flow (FCF). From income statement, you see that Firm A earned an EBIT of $200 million , tax rate is 20%, and its depreciation expense was $75 million. Firm A's gross fixed assets increased by $60 million from 2014 to 2015. The firms current assets decreased by $10 million and spontaneous current liabilities increased by $6 million from 2014 to 2015. What is Firm A's operation Cash flow (OCF), investment in operating capital, and free cash flow (FCF) for 2015, respectively in millions?

Explanation / Answer

a)Operating cash flow = EBIT (1-Tax) +depreciation + Decrease in current asset +Increase in current liability

                       = 200 (1-.20) + 75 + 10 +6

                       = 160 + 75 +10+6

                        = $ 251 million

b)Investment in operating capital = 10-6 = $ 4 million

c) Free cash flow = OCF -capital expenditure

                          = 251 - 60

                          = $ 191 million

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