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The 2014 income statement for Tiggie's Stuffed Toys shows that depreciation expense is $71 million, EBIT is $150 million, EBT is $86 million, and the tax rate is 30 percent
The 2014 income statement for Tiggie's Stuffed Toys shows that depreciation expense is $71 million, EBIT is $150 million, EBT is $86 million, and the tax rate is 30 percent. At the beginning of the year, the balance of gross fixed assets was $562 million and net operating working capital was $150 million. At the end of the year gross fixed assets was $648 million. Tiggie's free cash flow for the year was $152 million. Calculate the end of year balance for net operating working capital.
Expert Solution
Computation of End of Year Balance for Net Operating Working Capital:
Operating cash flow = EBIT * (1- Tax rate) + Depreciation Expense
= $150 million* (1-0.30) + $71 million
= $176 millions
Free cash flow = Operating cash flow - Investment in operating capital
$152 million = $176 million - Investment in operating capital
Investment in operating capital = $176 million - $152 million = $24 million
Investment in operating capital = Changes in gross fixed assets + Changes in operating working capital
$24 million = ($648 million - $562 million) + ( Ending operating working capital - $150 million)
$24 million = $86 million + Ending operating working capital - $150 million
Ending operating working capital= $88 million
End of year balance for net operating working capital = $88 million
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