Question 11.1: Sagittarius plc generated sales of £220 million during the y...

Financial Management for Decision Makers

Sagittarius plc generated sales of £220 million during the year and has an operating profit margin of 25 per cent of sales. Depreciation charges for the year were £8.0 million and the cash tax rate for the year was 20 per cent of operating profit. During the year, £11.3 million was invested in additional working capital and £15.2 million was invested in additional non-current assets. A further £8.0 million was invested in the replacement of existing non-current assets.

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The free cash flows are calculated as follows:

	£m	£m
Sales revenue		$\underline{220.0}$
Operating profit (25% × £220m)		55.0
Add Depreciation charge		$\underline{8.0}$
Operating cash flows		63.0
Less Cash tax (20% × £55m)		$\underline{(11.0)}$
Operating cash flows after tax		52.0
Less Additional working capital	(11.3)
Additional non-current assets	(15.2)
Replacement non-current assets	$\underline{(8.0)}$	$\underline{(34.5)}$
Free cash flows		$\underline{17.5}$

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