Free Cash Flow The 2010 income statement for Lou's Shoes shows that depreciation expense is $2 million, EBIT is $5 million, EBT is $3 million, and the tax rate is 40 percent. At the beginning of the year, the balance of gross fixed assets was $16 million and net operating working capital was $6 million. At the end of the year gross fixed assets was $20 million. Lou's free cash flow for the year was $4 million. What is their end of year balance for net operating working capital?

Question

Quizplus · Accepted Answer

Free cash flow (FCF) can be calculated using the following formula:

FCF = EBIT * (1 - Tax rate) + Depreciation - Capital expenditures - Increase in net operating working capital

We are given that FCF is $4 million. We also know that depreciation is $2 million. Let's assume that capital expenditures for the year are $x million.

Using the information provided, we can set up the following equation:

$4 million = $5 million * (1 - 0.4) + $2 million - $x - (Ending net operating working capital - Beginning net operating working capital)

Simplifying this equation, we get:

$4 million = $3 million + $2 million - $x - (Ending net operating working capital - $6 million)

$4 million = $5 million - $x - Ending net operating working capital + $6 million

Solving for ending net operating working capital, we get:

Ending net operating working capital = $3.8 million

Therefore, the answer is B) $3.8 million

Free Cash Flow the 2010 Income Statement for Lou's Shoes