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22 June, 12:57

You have gathered this information on a firm: $500,000 sales, $10,000 cash dividends, $300,000 cost of goods sold, $20,000 administrative expense, $20,000 depreciation expense, $40,000 interest expense, $10,000 purchase of productive equipment, no changes in working capital, and a tax rate of 21%. What is the free cash flow

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  1. 22 June, 13:22
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    Free Cash flow $144,800

    Explanation:

    The question is to determine the free cash flow for the firm

    This is done as follows

    First we calculate the earnings before interest and tax (EBIT)

    EBIT = Sales - Cost of Goods sold - Administrative expenses - Depreciation expenses

    = $500000 - $300,000 - $20,000 - $20,000 = $160,000

    Secondly, we calculate the Taxes by subtracting the interest from the EBIT and then finding 21% tax rate

    = $160,000 - $40,000 = $120,000 x 0.21 = $25,200

    So, Free Cash Flow

    EBIT $160,000

    Less: Taxes 25,200

    Net incomes before Interest $134,800

    Add: Depreciation $20,000

    Less: Capital expenditure (equipment) ($10,000)

    No changes in Net Working Capital (0)

    Free Cash flow $144,800
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