Free Cash Flow The 2013 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

Using the formula for free cash flow:

Free Cash Flow = EBIT*(1-tax rate) + Depreciation - Capital Expenditures - ∆Net Operating Working Capital

We have:

4 million = 5 million*(1-0.4) + 2 million - (20 million - 16 million) - ∆NOWC

Solving for ∆NOWC:

∆NOWC = 3.8 million

Therefore, the end of year balance for net operating working capital is $3.8 million.

The correct answer is B.

Free Cash Flow the 2013 Income Statement for Lou's Shoes