Question

5Hannaford Enterprises reported earnings before interest, taxes, depreciation and amortization (EBITDA) of $ 500 million in 1999. The firm had depreciation of $ 80 million and reported capital expenditures of $ 120 million. In addition, the firm acquired another firm for $ 150 million during 1999, and reported amortization of $ 40 million for the year. Finally, the firm’s total working capital increased from $ 80 million to $ 180 million, but half of this increase was due to an increase in the cash balance; the firm has no short term debt. If the firm has a tax rate of 40%, estimate the free cash flow to the firm.

Answer 1

Answer:

$28,000,000

Explanation:

EBIT = EBITDA - depreciation - amortization

        =  $500 - $ 80 - $ 40

        = $380 million

Net Income = EBIT - Tax @40%

                    = $380 - $152

                    = $228 million

Cash Flow from operating Activities:

=  Net Income - Increase in NWC (after reducing cash increase) + Back Depreciation + Back Amortization

= $228 - $50 + $ 80 + $ 40

= $298,000,000

Free cash Flow after Investing Activities:

= Cash Flow from operating Activities - Capital expenditure - Investment in another firm

= $298,000,000 - $120,000,000 - $150,000,000

= $28,000,000