EXERCISE: The Alpine Lemonade Co

Below are Balance Sheets and Income Statements for 2 subsequent years for the Alpine Lemonade Co.
Year 0 is the last historical year and Year 1 is a projection year (pro forma).
If the tax rate is 40% and the projections come true, what will Alpine's Free Cash Flow be for year 1?

Balance Sheet End of Year 0 End of Year 1

Cash 8 27
Accounts Receivable 70 90
Inventory 90 110
Current Assets 168 227
Fixed Assets 360 415
Accumulated Depreciation 80 110
Net Fixed Assets 280 305
Total Assets 448 532

Notes Payable Bank 30 25

Accounts Payable 20 38
Accrued Expenses 28 44
Current Liabilities 78 107
Long Term Debt 170 185
Total Liabilites 248 292
Common Stock 150 160
Retained Earnings 50 80
Net Worth 200 240
Liabilities & Net Worth 448 532

Income Statement Year 0 Year 1

Sales 800 1000
Expenses 704 880
Operating Profit 96 120
Interest 16 20
Earnings Before Taxes 80 100

Provision for Tax 32 40

Net Income 48 60
Dividends 24 30
to Retained Earnings 24 30
Solution
Operating Working Capital End of Year 0 End of Year 1
Accounts Receivable 70 90
+ Inventory 90 110
- Accounts Payable 20 38
- Accrued Expenses 28 44
OWC 112 118
Change in OWC 6

Income'Statements Y=0 Y=1

Sales 800 1000
Expenses 704 880
Operating Profit 96 120
Interest 16 20
Earnings Before Taxes 80 100
Provision for Tax 32 40 40% of Earning Before Tax
Net Income 48 60
Dividends 24 30
Retain Earning 24 30 (Ratain earning = Net- Dividends)

FCF Y=1
Operating'Profit'(EBIT) 120
(-)Tax on Operating Profit (.40) 48 (40% of 120)
Total Net Operating Profit 72
Add Deprecition 30 Accumulated Depreciation (EOY1-EOY0)
Minus Capex 55 Fixed Assets (EOY1- EOY0)

Minus Investment WC
+ AR = 20 (EOY 1- EOY 0)
+ INV= 20 (EOY 1- EOY 0)
- AP = 18 (EOY 1- EOY 0)
- AE =16 (EOY 1- EOY 0)
WC (20+20-18-16) 6
FREE CASH FLOW 41
% of Earning Before Tax

tain earning = Net- Dividends)

Depreciation (EOY1-EOY0)
EOY1- EOY0)