Financial Management Solution to Problem 2-5B

FREE CSH FLOWS FROM AN ASSET PERSPECTIVE

STEP 1: Compute after tax cash flows from operations



EBT                                                                                                                      $ 270,000
(+) Interest expense                                                                                                   60,000
EBIT                                                                                                                        330,000
Depreciation                                                                                                            200,000
EBITDA                                                                                                                  530,000
Tax Expense                                       $ 108,000
Less change in tax payable                      -
Cash Taxes                                                                                                              108,000

After tax cash flows from Operations                                                                      422,000

STEP-2   Change in Net Operating Working CApital

Change in Current Assets:
Change in CAsh                                 $(50,000)
Change in A/c recieveables                  (20,000)
Change in Inventory                             (50,000)
Change in Current Assets                     (20,000)
Change non-interest bearing current debt:

Change in A/c payable                        $ (135,000)
Change in Accrued expenses                        -
Change in Non Interest bearing current debt(135,000)
Change in net operating work capital                                                                          $(115,000)

STEP 3:    Change in Long term Assets

Purchase of fixed assets                             $ 300,000
Chan ge in other assets                                      -
Net Cash used for Investment                                                                                      $(300,000)
Assets free Cas Flows                                                                                                  $ 7000

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FREE CASH FLOWS FROM FINANCING PERSPECTIVE

Interest Expense                                                $(60,000)
Less change in interst payable                               -
Interest paid to lenders                                                                                                  $(60,000)
Increase in notes payables                                                                                               115,000
Common Stock dividened                                                                                               (62,000)
Financing free Cash Flows                                                                                              $(7000)