Quantitative Problem: Rosnan Industries\' 2013 and 2012 balance sheets and incom

Question

Quantitative Problem: Rosnan Industries' 2013 and 2012 balance sheets and income statements are shown below Balance Sheets: 2013 2012 $85 300 250 $635 1,490 $2,125 Cash and equivalents Accounts receivable Inventories $100 275 375 $750 2,300 $3,050 Total current assets Net plant and equipment Total assets $85 50 75 $210 290 1,225 400 $2,125 Accounts payable Accruals Notes payable $150 75 150 $375 450 1,225 1,000 $3,050 Total current liabilities Long-term debt Common stock Retained earnings Total liabilities and equity

Explanation / Answer

Free cash flow is given the below formula:

EBIT(1-Tax Rate) + Depreciation & Amortization - Change in Net Working Capital - Capital Expenditure

Here EBIT = 950

Tax rate = 40% = 0.4

Depreciation = 100

Chnage in net working capital = Current assets - Current liabilties = 750 -375 = 375

Capital expenditure = 2300 -1490 = 810

So Free cash flow = 950*(1-0.4) + 100 - 375 - 810 = -515

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