Question

The focus on traditional financial statements is -Select-marketaccountingreplacementItem 1  data rather than cash flow. However, cash flow is important to investors, managers, and stock analysts. Therefore, corporate decision makers and security analysts need to modify accounting data provided to them. An important modification is the concept of free cash flow (FCF). Many analysts regard FCF as being the single and most important number that can be developed from the accounting statements, even more important than net income. The equation for free cash flow is:

FCF = [EBIT(1 - T) + Depreciation and amortization] - [Capital expenditures + ΔNet operating working capital]

-Select-NetFreeOperatingItem 2  cash flow is the cash flow actually available for payments to all investors (stockholders and debtholders) after the company has made investments in fixed assets, new products, and -Select-operating working capitalnet working capitallong-term debtItem 3 . A negative FCF means that the company does not have sufficient -Select-externalinternalItem 4  funds to finance its investments in fixed assets and working capital, and that it will have to raise new money in the -Select-spotcapitalexchangeItem 5  markets to pay for these investments. Negative FCF is not always bad. If FCF is negative because after-tax operating income is negative this is bad, because the company is probably experiencing operating problems. Exceptions to this might be startup companies, companies incurring significant expenses to launch a new product line, and high-growth companies—with large capital investments.

Quantitative Problem: Rosnan Industries' 2018 and 2017 balance sheets and income statements are shown below.

Balance Sheets
Assets	2018	2017
Cash and equivalents	$100	$85
Accounts receivable	275	300
Inventories	375	250
Total current assets	$750	$635
Net plant and equipment	2,300	1,490
Total assets	$3,050	$2,125
Liabilities and Equity
Accounts payable	$150	$85
Accruals	75	50
Notes payable	150	75
Total current liabilities	$375	$210
Long-term debt	450	290
Total liabilities	825	500
Common stock	1,225	1,225
Retained earnings	1,000	400
Common equity	2,225	1,625
Total liabilities and equity	$3,050	$2,125

Income Statements
	2018	2017
Sales	$3,100	$1,600
Operating costs excluding depreciation and amortization	1,250	1,000
EBITDA	$1,850	$600
Depreciation and amortization	100	75
EBIT	$1,750	$525
Interest	62	45
EBT	$1,688	$480
Taxes (40%)	675	192
Net income	$1,013	$288
Dividends paid	$53	$48
Addition to retained earnings	$600	$240
Shares outstanding	100	100
Price	$25.00	$22.50
WACC	10.00%

The balance in the firm's cash and equivalents account is needed for operations and is not considered "excess" cash.

Using the financial statements given above, what is Rosnan's 2018 free cash flow (FCF)? Use a minus sign to indicate a negative FCF. Round your answer to the nearest dollar.
$   

Answer 1