Question

Consider recent financials for Ellie's Essentials LLC:

Balance Sheet

	2018	2017
Current Assets	$11,225.00	$10,000.00
Net PPE	$31,000.00	$30,000.00
Total Assets	$42,225.00	$40,000.00
Current Liabilities	$8,441.00	$8,000.00
Long-term debt	$13,970.00	$12,000.00
Total Liabilities	$22,411.00	$20,000.00
Shareholder Equity	$19,814.00	$20,000.00
Liabilities and Equity	$42,225.00	$40,000.00

Income Statement	2018	2017
SALES	$11,000.00	$10,000.00
COGS	$4,400.00	$4,000.00
GROSS PROFIT	$6,600.00	$6,000.00
S&A	$1,100.00	$1,000.00
Depreciation	$550.00	$500.00
EBIT	$4,950.00	$4,500.00
INTEREST	$1,272.00	$1,200.00
EBT	$3,678.00	$3,300.00
TAXES (36.00%)	$1,324.08	$1,188.00
NET INCOME	$2,353.92	$2,112.00

Going forward, analysts have forecasted the following free cash flows: $2,550.00 in 2019, and $2,600.00 in 2020. After that point, analysts expect free cash flows to grow at 5.00%. The firm has no short-term debt or preferred stock, and there are 1,000 shares outstanding. The firm's cost of capital is 11.00%.

Find the free cash flow for the firm in 2018.

Answer 1

Free cash flow to the firm = EBIT * ( 1 - Tax rate) + depreciation - changes in working capital - capital expenditures

Working capital = current assets - current liabilities

Working capital (2017 ) = 10000 -8000 = 2000

Working capital (2018 ) = 11225 - 8441 = 2784

Changes in working capital = 2784 - 2000 = 784

capital expenditures = changes in PPE = 31000 - 30000 = 1000

Free cash flow to the firm in 2018 = 4950 * ( 1 - 0.36) + 550 - 784 -1000

= $1,934