Question

3. Use the information below to find the firm's cash flows (OCF, NCS, change in NWC, FCF, CFC, CFS). The firm's plowback ratio is 60% and the average tax rate is 30%. 2015 2016 Sales $3,500 Cost of Goods Sold $1,800 Depreciation Expense $875 Interest Expense $425 Current Assets $2,000 $2,500 Total Fixed Assets $6,200 $7,300 Accumulated Depreciation $1,300 200 This can be determined from the information given Current Liabilities $1,300 $1,500 Long-term Debt $3,500 $3,700 Common Stock This can be determined from the $1,200 $1,200 information given

Answer 1

Calculation of Net Income:	Amount($)
Sales	3500
Less:COGS	1800
Less:Depreciation	875
Less:Interest Expense	425
Net Income before Tax	400
Tax @ 30%	120
Net Income after Tax	280
Transferred to Retained Earnings (280*0.6)	168
Paid to Common Stock Holders	112
Operating Cash Flow (OCF):
Net Income after Tax	280
Add: Depreciation	875
Less:Increase in Current Assets	500
Add:Increase in Current Liabilities	200
Operating Cash Flow (OCF):	855

.

Net Capital Spending = (7300-6200) = $1100

.

.

Change in Net Working Capital (NWC) = Working Capital in Year 2016 - Working capital in Year 2015

= (2500-1500) - (2000-1300)

= 1000 - 700

= $300

.

.

Free Cash Flow (FCF) = Operating Cash Flows - Capital Expenditures

= 855 - 1100

= -$245