No short-term borrowing

A firm reported the following results for 2024:

Sales= $61,000, COGS=$37,000, Depreciation= $8,000, Interest expense= $1,000, Dividends paid= $1,500

At the beginning of the year: NFA= $40,000, CA= $10,000, CL= $7,500

At the end of the year: NFA= $42,000, CA= $15,500, CL=$9,000

Effective tax rate is 21%

=> Compute the FCF for 2024, assuming all CA and CL pertain to operations.

To compute the Free Cash Flow (FCF) for 2024, assuming all current assets (CA) and current liabilities (CL) pertain to operations, we'll follow the steps below:

### 1. Calculate Net Income
Net Income can be calculated using the following formula:

\[
\text{Net Income} = (\text{Sales} - \text{COGS} - \text{Depreciation} - \text{Interest Expense}) \times (1 - \text{Tax Rate})
\]

Substituting the values:

\[
\text{Net Income} = (61{,}000 - 37{,}000 - 8{,}000 - 1{,}000) \times (1 - 0.21)
\]
\[
\text{Net Income} = (15{,}000) \times 0.79 = 11{,}850
\]

### 2. Add Back Depreciation
Depreciation is a non-cash expense, so we add it back to net income to calculate the Operating Cash Flow (OCF):

\[
\text{Operating Cash Flow (OCF)} = \text{Net Income} + \text{Depreciation}
\]
\[
\text{OCF} = 11{,}850 + 8{,}000 = 19{,}850
\]

### 3. Calculate Changes in Net Working Capital (NWC)
Net Working Capital (NWC) is defined as Current Assets (CA) minus Current Liabilities (CL). We calculate the change in NWC from the beginning to the end of the year:

\[
\text{NWC at Beginning of Year} = \text{CA} - \text{CL} = 10{,}000 - 7{,}500 = 2{,}500
\]
\[
\text{NWC at End of Year} = \text{CA} - \text{CL} = 15{,}500 - 9{,}000 = 6{,}500
\]

\[
\text{Change in NWC} = \text{NWC at End of Year} - \text{NWC at Beginning of Year} = 6{,}500 - 2{,}500 = 4{,}000
\]

### 4. Calculate Net Capital Expenditure (Net CapEx)
Net Capital Expenditure (Net CapEx) is calculated as the change in Net Fixed Assets (NFA) plus Depreciation:

\[
\text{Net CapEx} = (\text{NFA at End of Year} - \text{NFA at Beginning of Year}) + \text{Depreciation}
\]
\[
\text{Net CapEx} = (42{,}000 - 40{,}000) + 8{,}000 = 2{,}000 + 8{,}000 = 10{,}000
\]

### 5. Compute Free Cash Flow (FCF)
Finally, Free Cash Flow (FCF) is calculated as:

\[
\text{FCF} = \text{Operating Cash Flow (OCF)} - \text{Change in NWC} - \text{Net CapEx}
\]
\[
\text{FCF} = 19{,}850 - 4{,}000 - 10{,}000 = 5{,}850
\]

### **Conclusion**
The Free Cash Flow (FCF) for 2024 is **$5,850**.

---

Would you like to dive deeper into any part of the calculation or explore related concepts?

Here are some questions to consider:
1. What are the implications of a positive Free Cash Flow (FCF) for a company's financial health?
2. How can a company use Free Cash Flow (FCF) to fund its operations or investments?
3. Why is Net Capital Expenditure (CapEx) subtracted when calculating Free Cash Flow (FCF)?
4. What role does working capital management play in affecting Free Cash Flow (FCF)?
5. How does Free Cash Flow (FCF) relate to shareholder value?

**Tip:** Monitoring changes in Net Working Capital (NWC) can provide insights into a company’s operational efficiency and liquidity.

Learn how to calculate Free Cash Flow (FCF) for the year 2024 using financial data, including sales, cost of goods sold (COGS), depreciation, interest expense, dividends paid, and changes in current assets and liabilities. Follow a detailed step-by-step solution with formulas and computations.

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