Finding operating and free cash flows Consider the balance sheets and selected data from the income statement of Keith Corporation that follow.
a. Calculate the firm’s accounting cash flow from operations for the year ended December 31, 2003, using Equation 3.1.
Equation 3.1
Cash flow from operations=
Net profits after taxes + Depreciation and other noncash charges
b. Calculate the firm’s operating cash flow (OCF) for the year ended December 31, 2003, using Equation 3.2.
Equation 3.2
OCF=EBIT Taxes+ Depreciation
c. Calculate the firm’s free cash flow (FCF) for the year ended December 31, 2003, using Equation 3.3.
d. Interpret, compare, and contrast your cash flow estimates in parts a, b, and c.
Equation 3.3
FCF= OCF Net fixed asset investment (NFAI)
Net current asset investment (NCAI)
Keith Corporation |
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December 31 |
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Assets |
2003 |
2002 |
|
Cash |
$1,500 |
$1,000 |
|
Marketable securities |
1,800 |
1,200 |
|
Accounts receivable |
2,000 |
1,800 |
|
Inventories |
2,900 |
2,800 |
|
Total current assets |
$8,200 |
$6,800 |
|
Gross fixed assets |
$29,500 |
$28,100 |
|
Less: Accumulated depreciation |
14,700 |
13,100 |
|
Net fixed assets |
$14,800 |
$15,000 |
|
Total assets |
$23,000 |
$21,800 |
|
Liabilities and Stockholders’ Equity |
|
|
|
Accounts payable |
|
$1,600 |
$1,500 |
Notes payable |
|
2,800 |
2,200 |
Accruals |
200 |
300 |
|
Total current liabilities |
|
$4,600 |
$4,000 |
Long term debt |
|
$5,000 |
$5,000 |
Common stock |
|
$10,000 |
$10,000 |
Retained earnings |
|
3,400 |
2,800 |
Total stockholders’ equity |
|
$13,400 |
$12,800 |
Total liabilities and stockholders’ equity |
|
$23,000 |
$21,800 |
Income Statement Data (2003) |
|
|
|
Depreciation expense |
|
$11,600 |
|
Earnings before interest and taxes (EBIT) |
|
2,700 |
|
Taxes |
933 |
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Net profits after taxes |
|
1,400 |