FREE CASH FLOW Bailey Corporation’s financial statements (dollars and shares are in millions) are provided here.

Balance Sheets as of December 31

Income Statement for Year Ending December 31, 2015

1. a. What was net operating working capital for 2014 and 2015?
2. b. What was Bailey’s 2015 free cash flow?
3. c. Construct Bailey’s 2015 statement of stockholders’ equity.
4. d. What was Bailey’s 2015 EVA? Assume that its after-tax cost of capital is 10%.
5. e. What was Bailey’s MVA at year-end 2015? Assume that its stock price at December 31,

   2015 was $20.

To compute: The net operating working capital of Company B.

Financial Statements: A part of annual report that is attributed to the financials of the company for an accounting period is called financial statements. These include income statement, statement of retained earnings, balance sheet and cash flow statement.

Net Operating Working Capital: The difference of current assets and current liabilities is called working capital. When only accounts payable and accruals are considered instead of total current liabilities, the difference is called net operating working capital.

Solution:

Given (for 2015),

Accounts payable are $10,800.

Accruals are $7,600.

Current assets are $72,125.

Formula to compute net operating working capital,

Net Operating Working Capital=[Current Assets−Accounts Payable−Accruals]

Substitute $10,800 for accounts payable, $7,600 for accruals and $72,125 for current assets.

Net Operating Working Capital=$72,125−$10,800−$7,600=$53,725

Given (for 2014),

Accounts payable are $9,000

To compute: The free cash flow in 2015 for Company B.

Free Cash Flow: The cash generated over and above required by business operations and capital expenditure is called free cash flow. Statement of cash flow reports the cash flow generated or consumed by the business.

To prepare: The statement of stockholders’ equity of Company B for 2015.

Statement of Stockholders’ Equity: Statement of stockholders’ equity shows the opening and closing balance of stockholder’s equity with the changes occurred during the accounting period.

To compute: The economic value added for Company B.

Economic Value Added (EVA): It is a measure along with market value added, to evaluate management’s performance. It considers the opportunity costs of capital invested in the business and the net operating profit generated by the business.

To compute: The market value added for Company B in 2015.

Market Value Added: The measure to evaluate management’s performance in a company’s operations and growth, market value added considers the market value of company’s outstanding shares. It reports the market value over and above the book value of those outstanding shares.