Homer & Son Grease Recovery Company

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

2. 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).

3. Homer & Son Income Statement

4. Change in Assets & non-interest bearing current liabilities: OperFCF

5. 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 +Depreciation 100 -Cash Taxes 60 after-tax cash flow from operations 220

6. 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 Assets 100 -Change in non-interest bearing current liabilities change in accounts payable 100 +change in accrued expenses-50 change in non-interest current liabilities 50 increase in net operating working capital 50

7. 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

8. Total Operating Free Cash Flow After-tax cash flow from operations 220 Less increase in net oper. working capital 50 Less increase in fixed & other assets 100 Operating Free Cash Flow 70

9. 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

10. Homer & Son Grease Recovery Free CF Summary • Operating Free Cash Flow • After-Tax CF from operations 220 • Less inc. in net oper working cap. 50 • Less inc. in fixed & other assets 100 • Operating Free Cash Flow 70 • Financing Free Cash Flow 70