You Are Considering an Investment in Fields and Struthers, Inc

question 108

Multiple Choice

You are considering an investment in Fields and Struthers, Inc. and want to evaluate the firm's free cash flow. From the income statement, you see that Fields and Struthers earned an EBIT of $52 million, paid taxes of $10 million, and its depreciation expense was $5 million. Fields and Struthers' gross fixed assets increased by $38 million from 2012 to 2013. The firm's current assets increased by $20 million and spontaneous current liabilities increased by $12 million. Calculate Fields and Struthers' operating cash flow (OCF) , investment in operating capital (IOC) , and free cash flow (FCF) for 2013.

• A)OCF = $42,000,000; IOC = $37,000,000; FCF = $5,000,000
• B)OCF = $47,000,000; IOC = $37,000,000; FCF = $10,000,000
• C)OCF = $42,000,000; IOC = $46,000,000; FCF = -$4,000,000
• D)OCF = $47,000,000; IOC = $46,000,000; FCF = $1,000,000

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Definitions:

Variable Cost

Costs that change in proportion to the level of production or sales activity, such as raw materials and direct labor costs.

Fixed Costs

Fixed overheads that stay the same no matter how much is produced or sold, including rental fees or staff salaries.

Margin of Safety

The difference between actual or projected sales and the break-even point, indicating the amount by which sales can drop before a business incurs a loss.

Break-even Point

The level of sales at which total revenues equal total costs, and the business makes no profit but also incurs no loss.