The following table shows an abbreviated income statement and balance sheet for Quick Burger Corporation for 2016.

The following table shows an abbreviated income statement and balance sheet for Quick Burger Corporation for 2016.

INCOME STATEMENT OF QUICK BURGER CORP., 2016
(Figures in $ millions)
Net sales	$	27,583
Costs		17,585
Depreciation		1,418
Earnings before interest and taxes (EBIT)	$	8,580
Interest expense		533
Pretax income		8,047
Taxes		2,646
Net income	$	5,401

 

BALANCE SHEET OF QUICK BURGER CORP., 2016
(Figures in $ millions)
Assets	2016				2015				Liabilities and Shareholders' Equity	2016				2015
Current assets									Current liabilities
Cash and marketable securities		2,352				2,352			Debt due for repayment		—				415
Receivables		1,391				1,351			Accounts payable		3,419				3,159
Inventories		138				133			Total current liabilities		3,419				3,574
Other current assets		1,105				632
Total current assets		4,986				4,468
Fixed assets									Long-term debt		13,649				12,150
Property, plant, and equipment		24,693				22,851			Other long-term liabilities		3,073				2,973
Intangible assets (goodwill)		2,820				2,669			Total liabilities		20,141				18,697
Other long-term assets		2,999				3,115			Total shareholders’ equity		15,357				14,406
Total assets		35,498				33,103			Total liabilities and shareholders’ equity		35,498				33,103

In 2016 Quick Burger had capital expenditures of $3,065.


a. Calculate Quick Burger’s free cash flow in 2016.



b. If Quick Burger was financed entirely by equity, how much more tax would the company
have paid?




c. What would the company’s free cash flow have been if it was all-equity financed?
 

Explanation
a.
Cash flow from operations = net income + interest + depreciation – additions to net working capital
Free cash flow = cash flow from operations – capital expenditures
Additions to net working capital = (3,419 − 3,159) − (1,391 − 1,351) − (138 − 133) − (1,105 − 632) = -258
Cash flow from operations = 5,401 + 533 + 1,418 -258 = 7,094
Capital expenditures = $3,065
Free cash flow = $7,094 – 3,065 = $4,029

b.
Tax increase due to $533 million more in taxable income  $186.55 = (533 × 0.35)

c.
Additions to net working capital = (3,419 − 3,159) − (1,391 − 1,351) − (138 − 133) − (1,089 − 632) = -258
Cash flow from operations = 5,747 + 0 + 1,418 − 258 = 6,907
Free cash flow = 6,907 − 3,065 = 3,842