BM1904

NAME: DATE: SCORE:

Free Cash Flow (20 points)

A company has an EBIT of P30,000,000, depreciation of P5,000,000, and a 40% tax rate. It needs to spend
P10,000,000 on new fixed assets and P15,000,000 to increase its current assets. It expects its accounts
payable to increase by P2,000,000, its accruals to increase by P3,000,000, and its notes payable to increase
by P8,000,000. The firm’s current liabilities consist of only accounts payable, accruals, and notes payable.
What is the company’s free cash flow?

1. Determine the Net Operating Working Capital:

NOWC = Current Assets – (Current Liabilities – Notes Payable)

NOWC = 15,000,000 – (13,000,000-8,000,000) = 15,000,000 – 5,000,000 = 10,000,000

2. Solve for free cash flow

FCF = [EBIT(1-T) + Depreciation and Amortization] – (Capital Expenditures + NOWC)

FCF = [30,000,000(1-0.4)+5,000,000] – (10,000,000+10,000,000)

FCF = [18,000,000+5,000,000] – 20,000,000 = 3,000,000

Rubric for grading:

CRITERIA POINTS
Complete solution with correct answer 10
Last two (2) major steps of the solution are incorrect 8
Half of the solution is correct 6
First two (2) major steps of the solution are correct 4
First major step of the solution is correct 2

Reference
Brigham, E. F. & Houston, J. F. (2017). Fundamentals of financial management (concise) (9th ed.). Boston, MA:
Cengage Learning.

03 Task Performance 1 *Property of STI

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