A financial analyst forecasts the financial statements of Jim & Brothers, Inc.,

Question

A financial analyst forecasts the financial statements of Jim & Brothers, Inc., a small grocery store. The three-year forecast of items in the financial statements are in the table below. Based on the forecast information, calculate the free cash flow for years 1 through 3. The tax rate is 40%.

$9.70

$ millons Year 0 1 2 3 Sales $100.00 $110.00 $117.70 $121.23 Cost of goods sold $65.00 $71.50 $76.51 $78.80 Selling, general and administrative expenses $15.00 $16.50 $17.66 $18.18 Depreciation $10.00 $11.00 $11.77 $12.12 Interest payment on debt $2.00 $2.50 $3.00 $3.50 Capital expenditure $5.00 $5.50 $5.89 $6.06 Current assets $10.00 $11.00 $11.77 $12.12 Current liabilities $8.00 $8.80 $9.42

$9.70

Explanation / Answer

Calculation of Free cash flow

Year - 1 `Year - 2 Year - 3 Sales 110 117.7 121.23 (-) Cost of goods sold 71.5 76.51 78.8 Gross Margin 38.5 41.19 42.43 (-) Operating expenses Selling and admin expenses 16.5 17.66 18.18 Depreciation 11 11.77 12.12 Operating Profit = GM - Op.Exp 11 11.76 12.13 (-) Interest 2.5 3 3.5 Earnings befor tax 8.5 8.76 8.63 (-) Tax @ 40% on EBT 3.4 3.504 3.452 Earnings after tax 5.1 5.256 5.178 (+) Depreciation 11 11.77 12.12 (+) Interest 2.5 3 3.5 Cash from Operating Activities 18.6 20.026 20.798 (-) Increase in current assets -1 -0.77 -0.35 (+) Increase in current liabilities 0.8 0.62 0.28 Cash from operating activities 18.4 19.876 20.728 (-) capital expenditure 5.5 5.89 6.06 Free cash flow 12.9 13.986 14.668

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