You are working on your second project as an equity research intern at a bulge i

Question

You are working on your second project as an equity research intern at a bulge investment bank. Your focus is in retail space, especially in the health and fitness sector. Currently, you are gathering information on a fast-growing chain fitness company called LuluYoga. You are interested in calculating the free cash flow of the firm.

LuluYoga offers yoga classes in several major cities in the United States. Two major revenue resources are selling workout gear and membership passes for class access.

Assume at the beginning of year 2016, LuluYoga has zero inventory.

In year 2016, LuluYoga purchased 10,000 yoga mats at a price of $10 each. The company sells 6,000 mats at a price of $15 in year 2016 and sells the remaining at a price of $20 in year 2017.

In year 2016, LuluYoga sells 1,000 membership passes for $2,000 each. 80% of the classes purchased were used in 2016 and the rest are used in 2017.The yoga master’s compensation to teach classes are $300K in year 2016 and $200K in year 2017.

LuluYoga pays corporate tax of 35%.

Q5. What is the change of NOWC in year 2016?

Explanation / Answer

In the given case LuluYoga offers yoga classes and its major income are selling workout gear and membership passes for classes.

We calculate here first the Free Cash folw of the firm for the year 2016 and 2017

Net operating working capital (NOWC) is the excess of operating current assets over operating current liabilities. In most cases it equals cash plus accounts receivable plus inventories minus accounts payable minus accrued expenses.

Net operating working capital is different from (net) working capital which simply equals current assets minus current liabilities. NOWC is an intermediate input in the calculation of free cash flow. Free cash flow equals operating cash flow minus gross investment in operating assets minus investment in net working capital.

In the given Case we can calculate the change of NOWC in 2016 in the given manner

Change of NOWC in 2016 = $1330000-0 =$1330000

Particulars 2016 2017 Sale of mats(6000*$15)(4000*$20) $90000 $80000 Membership Passes (800*$2000)(200*$2000) $1600000 $400000 Total Revenue (A) $1690000 $480000 Operating Expenses Purchases of Mats(6000*$10)(4000*$10) $60000 $40000 Compansation to teach class acces $300000 $200000 Total Operating Expenses (B) $360000 $240000 Operating Income (C=A-B) $1330000 $240000 (-) Corporate Tax @35% $465500 $84000 Net Operating Profit after Tax $864500 $156000

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.