Free Cash Flow You are considering an investment in Crew Cut, Inc. and want to e

Question

Free Cash Flow You are considering an investment in Crew Cut, Inc. and want to evaluate the firm's free cash flow. From the income statement, you see that Crew Cut earned an EBIT of $23.12 million, paid taxes of $3.88 million, and its depreciation expense was $7.88 million. Crew Cut's gross fixed assets increased by $10.12 million from 2007 to 2008. The firm's current assets increased by $6.12 million and spontaneous current liabilities increased by $3.88 million. What is Crew Cut's operating cash flow, investment in operating capital and free cash flow for 2008, respectively in millions? $2712, $12.36, $14.76 $2712, $1012,$17.00 $2312, S1012, $13.00 $2312, $1176, $1136

Explanation / Answer

Crew Cut’s operating cash flow was:

OCF = EBIT – Taxes + Depreciation= ($23.12 m. – $3.88 m + $7.88 m) = $27.12 m

Investment in operating capital for 2008 was:

IOC = Change in Gross fixed assets + Change in Net operating working capital= $10.12 m. + ($6.12 m. – $3.88 m.) = $12.36 m.

Accordingly, Crew Cut’s free cash flow for 2008 was:

FCF = Operating cash flow – Investment in operating capital= $27.12 m. – $12.36 m. = $14.76 m

So, the correct option is a.

Please revert to me in case of any queries:)

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