Free Cash Flow The 2010 income statement for Betty's Barstools shows that depreciation expense is $100 million, EBIT is $400 million, and taxes are $120 million. At the end of the year, the balance of gross fixed assets was $510 million. The increase in net operating working capital during the year was $94 million. Betty's free cash flow for the year was $625 million. What was the beginning of year balance for gross fixed assets?

Question

Quizplus · Accepted Answer

The formula for calculating free cash flow is:
FCF = EBIT × (1 - Tax Rate) + Depreciation - CapEx - ∆NWC

We have been given:

Depreciation expense = $100 million
EBIT = $400 million
Taxes = $120 million
FCF = $625 million
∆NWC = $94 million

Therefore,

625 = 400 × (1- tax rate) + 100 - CapEx - 94
CapEx = 391

To calculate the beginning of year balance for gross fixed assets, we can use the following formula:

Ending gross fixed assets = Beginning gross fixed assets + CapEx - Depreciation

We have been given:

Ending gross fixed assets = $510 million
CapEx = $391 million
Depreciation = $100 million

Therefore,

510 = Beginning gross fixed assets +391 - 100

Beginning gross fixed assets = $849 million

Hence, the correct answer is C) $849 million.

Free Cash Flow the 2010 Income Statement for Betty's Barstools