The 2015 income statement for Duffy\'s Pest Control shows that depreciation expe
ID: 2787385 • Letter: T
Question
The 2015 income statement for Duffy's Pest Control shows that depreciation expense was $200 million, EBIT was $510 million, and the tax rate was 35 percent. At the beginning of the year, the balance of gross fixed assets was $1,580 million and net operating working capital was $420 million. At the end of the year, gross fixed assets was $1,830mllion. Dufly's free cash flow for the year was $423 million. Calculate the end-of-year balance for net operating working capital. (Enter your answer in millions of dollars rounded to 1 decimal place.) Net operating working capitalExplanation / Answer
Duffy’s Pest Control’s operating cash flow was:
OCF = EBIT(1 – Tax rate) + Depreciation
= ($510m.(1 - 0.35) + $200m.) = $531.5m.
Duffy’s Pest Control’s free cash flow for 2015 was:
FCF = Operating cash flow – Investment in operating capital
$423m. = $531.5m. - Investment in operating capital
=> Investment in operating capital = $531.5m. - $423m. = $108.5m.
Accordingly, investment in operating capital for 2015 was:
IOC = Gross fixed assets + Net operating working capital
$108.5m. = ($1,830m. - $1,580m.) + (Ending net operating working capital - $420m.)
=> Ending net operating working capital = $108.5m. - ($1,830m. - $1,580m.) + $420m. = $278.5m.
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