Question

Tom is a newly hired financial manager for MM Steel Corporation. His boss Kin, the CFO of the company, wants him to review the company's last two years' financial records and assess the business's performance using its free cash flow measure. Tom is required to not only calculate the company's free cash flow value at the end of 2019, he also needs to present the result and explain it on the company's upcoming shareholder's meeting. You are asked to help Tom to complete this task. Below are MM Steel Corporation last two years' financial statements.

Answer 1

1.Capital Expenditure:

CAPEX₂₀₁₉=PP&E(current period)-PP&E(prior period)+Depreciation(current period)

=10224000-9660000+3844000

=4408000

2.Change in Net Operating Working Capital:

NOWC₂₀₁₉=Net operating Current Assets-Net operating Current Liability

=(cash & cash equivalents+Accounts receivable+Inventory)-(Accounts payable+Notes Payable+Accruals)

=(9088000+6904000+42912000)-(49900000+1563000+23000)

=7418000

NOWC₂₀₁₈=Net operating Current Assets-Net operating Current Liability

=(cash & cash equivalents+Accounts receivable+Inventory)-(Accounts payable+Notes Payable+Accruals)

=(10341000+6000000+37751000)-(43500000+1336000+146000)

=9110000

Change in NOWC₂₀₁₉= NOWC₂₀₁₉-NOWC₂₀₁₈

_{=7418000-9110000}

_=(1692000)

_{3.Free Cash Flow:}

_{FCF2019=EBIT*(1-Tax rate)+Depreciation-Changes in Working Capital-Capital Expenditure}

_{=4618000(1-35%)+3844000-(-1692000)-4408000}

_=4129700

_{1)Free cash flow or free cash flow to firm is a way of looking at a bussiness's cash flow to see what is available for the distribution among all the securities holders of a corporate entity.}

_{2)Cash positon is moderate.}

_{3)Company has sufficient cash balances to be distributed as dividend and interest to shareholders.}

_{4)Company can use its newly generated cash flow for payment of interest .}