Free Cash Flow The 2013 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

Free cash flow can be calculated using the following formula:

Free Cash Flow = Operating Cash Flow - Capital Expenditures

Operating Cash Flow can be calculated as:

Operating Cash Flow = EBIT + Depreciation - Taxes

In this case, we are given:

Depreciation = $100 million
EBIT = $400 million
Taxes = $120 million

Therefore, Operating Cash Flow = $400 million + $100 million - $120 million = $380 million

We are also given that:

Free Cash Flow = $625 million
Increase in Net Operating Working Capital = $94 million

Therefore:

Capital Expenditures = Increase in Net Operating Working Capital + (Ending Gross Fixed Assets - Beginning Gross Fixed Assets)

We are given Ending Gross Fixed Assets = $510 million.

Therefore, we can solve for Beginning Gross Fixed Assets:

Free Cash Flow = Operating Cash Flow - Capital Expenditures
$625 million = $380 million - ( $94 million + ($510 million - Beginning Gross Fixed Assets) )

Simplifying this equation, we get:

Beginning Gross Fixed Assets = $849 million

Therefore, the answer is (C) $849 million.

Free Cash Flow the 2013 Income Statement for Betty's Barstools