Question

You are considering an investment in Fields and Struthers, Inc. and want to evaluate the firm's free cash flow. From the income statement, you see that Fields and Struthers earned an EBIT of $52 million, paid taxes of $10 million, and its depreciation expense was $5 million. Fields and Struthers' gross fixed assets increased by $38 million from 2017 to 2018. The firm's current assets increased by $20 million and spontaneous current liabilities increased by $12 million.

1. Calculate Fields and Struthers' operating cash flow (OCF), investment in operating capital (IOC), and free cash flow (FCF) for 2018.

Answer 1

$47 million; $46 million; $1 million

Step-by-step explanation:

Operating cash flow (OCF):

= EBIT + Depreciation - Taxes

= $52 million + $5 million - $10 million

= $47 million

Investment in operating capital (IOC):

= Increase in gross fixed assets + (Increase in current assets - Increase in current liabilities)

= $38 million + ($20 million - $12 million)

= $38 million + $8 million

= $46 million

Free cash flow (FCF):

= Operating cash flow - Investment in operating activities - Increase in fixed assets

= $47 million - $46 million

= $1 million