Question

Last year Miami Rivet had $5 million in operating income (EBIT). Its depreciation expense was $1 million, its interest expense was $1 million, and its corporate tax rate was 25%. At year- end, it had $14 million in operating current assets, $3 million in accounts payable, $1 million in accruals, $2 million in notes payable, and $15 million in net plant and equipment. Assume Miami Rivet has no excess cash. Miami Rivet uses only debt and common equity to fund its operations. (In other words, Miami Rivet has no preferred stock on its balance sheet.) Miami Rivet had no other current liabilities. Assume that Miami Rivet only noncash item was depreciation. Based on this information answer the following questions:

I am not sure if the above information is needed

QUESTION: Miami Rivet had $12 million in net plant and equipment the prior year. Its net operating working capital has remained constant over time. What is the company’s free cash flow (FCF) for the year that just ended? Note that capital expenditures are equal to the change in net plant and equipment plus the annual depreciation expense.

Answer 1

first lets calculate capital expenditure of current year

Capital expenditure = change in net plant and equipment +depreciation expense

capital expenditure = (15,000,000 - 12,000,000) + 1000,000

= 3,000,000 + 1,000,000

= 4,000,000

Free cash flows = EBIT(1- tax rate) + depreciation * tax rate - change in net operating working capital - capital expenditure

= 5000000(1-0.25) + 1000000*0.25 - 0 - 4000000

Free cash flow = 3750000 + 250000 - 0 - 4,000,000

= 0