2. Homer & Son Grease Recovery Company Free Cash Flow Example

3. Homer & Son Grease Recovery Co. Example ► Find Free Cash Flow from Operating Perspective.  Inflows & outflows from company’s perspective.  Need operating income, that year’s depreciation, cash taxes paid, change in current assets during year, change in non-interest bearing current liabilities, & change in gross fixed and other assets. ► Find Free Cash Flow from Financing Perspective.  Inflows & outflows from investors’ perspective.  Need interest expense, dividends paid (given or EAT minus change in retained earnings), change in interest bearing debt, & change in stock accounts (except retained earnings).

4. Homer & Son Income Statement Sales3000 Cost of goods 2000 Gross Profit 1000 SGA Expense 720 Depreciation100 Oper. Persp. Operating Inc. 180 Oper. persp. Interest Exp 30Financing EBT150 Taxes(cash)60 Oper. Persp. EAT90 Divs = 40 Fin

5. Change in Assets & non-interest bearing current liabilities: OperFCF 20022001 2002- 2001 Assets Total CA 900800100 Gross FA 15001300200 Other Assets 100200-100 Liabilities Acct Pay 450350100 Acc Exp 100150-50

6. Operating Free Cash Flow : After-tax cash flow from operations ► Operating Perspective = after-tax cash flow from operations – increase in net operating working capital – increase in gross fixed and other assets After-tax cash flow from operations: Operating Income (EBIT)180 +Depreciation100 -Cash Taxes 60 after-tax cash flow from operations 220

7. Operating Free Cash Flow : increase in net operating working capital ► Increase in net operating working capital = change in current assets – change in non-interest bearing current liabilities Change in Total Current Assets100 -Change in non-interest bearing current liabilities change in accounts payable100 +change in accrued expenses-50 change in non-interest current liabilities50 increase in net operating working capital 50

8. Operating Free Cash Flow : increase in gross fixed and other assets ► Increase in gross fixed and other assets: Change in gross fixed assets 200 +Change in other assets-100 increase in gross fixed and other assets 100

9. Total Operating Free Cash Flow After-tax cash flow from operations220 Less increase in net oper. working capital 50 Less increase in fixed & other assets 100 Operating Free Cash Flow70

10. Financing Free Cash Flow Interest Expense 30 +Dividends 40 -Change in short-term debt 50 -Change in long-term debt-50 - Change in common stock 0 Free Cash Flow from Financing 70

11. Homer & Son Grease Recovery Free CF Summary ► Operating Free Cash Flow  After-Tax CF from operations220  Less inc. in net oper working cap. 50  Less inc. in fixed & other assets100  Operating Free Cash Flow 70 ► Financing Free Cash Flow70