3-14

FREE CASH FLOW

Bailey Corporation’s financial statements (dollars

and shares are in millions) are provided.
 Balance Sheets as of December 31
2015 2014
Assets
Cash and cash equivalents $ 14,000 $ 13,000
Accounts receivable 30,000 25,000
Inventories 28,125 21,000
Total current assets $ 72,125 $ 59,000
Net plant and equipment 50,000 47,000
Total assets $ 122,125 $ 106,000

Liabilities and Equities

Accounts Payable $ 10,800 $ 9,000
Accruals 7,600 6,000
Notes Payable 6,700 5,150
Total current liabilities $ 10,800 $ 20,150
Long-term bonds 15,000 15,000
Total liabilities $ 10,800 $ 35,150
Common stock (5,000 sh.) 50,000 50,000
Retained earnings 32,025 20,850
Common equity $ 82,025 $ 70,850
Total liabilities and equity $ 122,125 $ 106,000
 Income Statement for year ending December 31, 2015

Sales $ 214,000
Operating cost excluding depreciation 170,000
and amortization
EBITDA $ 44,000
Depreciation and Amortization 5,000
EBIT $ 39,000
Interest 1,750
EBT $ 37,250
Taxes (40%) 14,900
Net income $ 22,350
Dividends paid $ 11,175
a. What was net operating working capital for 2014 and 2015?

Solutions:
Net operating working capital (NOWC) = Current Assets - Non-Interest-Bearing Current
Liabilities

2015 2014

Current Assets $ 72,125 $ 59,000

Non-Interest-Bearing (18,400) (15,000)

Current Liabilities

NOWC (Net operating $ 53,725 $ 44,000

working capital)
B. What was Bailey’s 2015 free cash flow?

Formula:
Free Cash Flow (FCF) = OCF - (Capital Expenditure + ΔNOWC)
Solution:
OCF = NOPAT + Depreciation and Amortization
= EBIT (1 - Tax Rate) + Dep. & Amortization
= $ 39,000 (60%) + $ 5,000
= $ 28,400
Capital Expenditure = Net Plant & Equip. 2015 - Net Plant & Equip. 2014 + Dep. & Amort.
= ($ 50,000 - $ 47,000 )+ $ 5,000
= $ 8,000
ΔNOWC = $53,725 - $44,000
= $9,725

FCF =$ 28,400 - ($ 8,000 + $ 9,725)

= $ 28,400 - $ 17,725
= $ 10,675
C. Construct Bailey’s 2015 statement of stockholders equity.

Bailey Corporation
Statement of Stockholders Equity
For the year ended December 31, 2015

Total Shareholder’s equity, January 1, 2015 $ 50,000

Shares Issued during the year 20,850
Total Investment $ 70,850
Net Income 22,350
Less: Dividends declared and paid 11,175
Total Shareholder’s equity, December 31, 2015 $ 82,025
D. What was Bailey’s 2015 EVA? Assume that its after tax-cost of capital is 10%

Formula:
Economic Value Added (EVA) = NOPAT - (After tax Cost of Capital) (Operating Capital)

Solution:

EVA= 23,400 - (10%) (NOWC + Net Fixed Assets)

= 23,400 - (10%)(53,725 + 50,000)
= 23,400 - (10%)(103,725)
= 23,400 - 10,372.50

= $ 13,027.50
E. What was Bailey’s MVA at year-end 2015? Assume that its stock price at December 31,
2015 was $ 20.

Formula:
Market Value Added (MVA) = ( Share Price * No. of Shares) - Book value of the
Co.
Solutions:

MVA = ($ 20 * 5,000 shares ) - $ 82,025

= $ 100,000 - $ 82,025
= $ 17,975