FINMAN Supplementary Notes – Free Cash Flows IP1 – Suggested Solutions

Free cash flows from an asset perspective:

Operating income (EBIT) $ 360,000
Depreciation 200,000
EBITDA $ 560,000
Tax expense $ 120,000
Less change in tax payable -
Cash taxes $ 120,000
After-tax cash flows from operations $ 440,000

Change in net working capital

Change in current assets:
Change in cash $ (50,000)
Change in accounts receivable (25,000)
Change in inventory 75,000
Change in current assets $ -

Change in noninterest-bearing current debt:

Change in accounts payable $ (50,000)
Change in net operating working capital $ (50,000)

Change in long-term assets:

Purchase of fixed assets (400,000)
Free cash flows - asset perspective $ (10,000)

Free cash flows from a financing perspective:

Interest expense $ (60,000)
Less change in interest payable -
Interest paid to lenders $ (60,000)
Repayment of long-term debt -
Increase in short-term debt 150,000
Common stock dividends paid to owners (80,000)
Free cash flows - financing perspective $ 10,000

Note: The dividends were computed by comparing net income against the change in
retained earnings. Net income was $180,000, but retained earnings increased only by
$100,000; thus the balance was distributed in the form of dividends.

Pamplin, Inc. had an after-tax operating cash flow of $440,000. Additionally, Pamplin
acquired further financing though increasing short-term debt by $150,000. This cash was
mainly used to purchase fixed assets of $400,000. The remainder was used to decrease
payables to suppliers by $50,000, pay interest of $60,000, and pay dividends back to the
investors of $80,000.