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. Calculate Fields and Struthers' operating cash flow (OCF), investment in operating capital (IOC), and free cash flow (FCF) for 2018.
A) OCF = $42,000,000; IOC = $37,000,000; FCF = $5,000,000
B) OCF = $47,000,000; IOC = $37,000,000; FCF = $10,000,000
C) OCF = $42,000,000; IOC = $46,000,000; FCF = −$4,000,000
D) OCF = $47,000,000; IOC = $46,000,000; FCF = $1,000,000

Question

Quizplus · Accepted Answer

Operating Cash Flow (OCF) is calculated as EBIT + Depreciation - Taxes = $52M + $5M - $10M = $47M. Investment in Operating Capital (IOC) is the increase in gross fixed assets plus the net change in working capital (increase in current assets - increase in spontaneous current liabilities) = $38M + ($20M - $12M) = $46M. Free Cash Flow (FCF) is OCF - IOC = $47M - $46M = $1M.

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