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    Calculating a firm's free cash flow (FCF)

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    Hello, I understand FCF be found by the expression FCF = (NOPAT - net investment in operating capital)

    First, I calculated NOPAT as EBIT(1-Tax rate)
    Naturally, I found EBIT listed on the income statement but I calculated the tax rate by dividing the amount of tax paid by the pretax income.

    248/846 = 29.31% tax rate....so I take the $873 (1-.2931) = $617.12 million NOPAT

    OK...here's where I think I'm getting off track. To find the net investment in operating capital, I can use the expression (Capital expenditures - depreciation). What struck me as odd is the in this instance, the firm has $138 in capital expenditures but $174 in depreciation and amortization. This would give a negative net investment in operating capital. Could this be correct or am I going totally off track?

    Essentially, I came up with FCF = (617.12 - (138-174)) = $653.12 million.

    Any insight would be greatly appreciated.

    See attached files for data.

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    Solution Preview

    FCF = EBIT * (1- tax rate) + Dep. & Amort. - Change in Working Capital - Capital Expenditures

    FCF = ...

    Solution Summary

    The expert calculates a firm's free cash flow.