XYZ Corp. had operating income this year of $120 million and is in the 40% tax b
ID: 1170236 • Letter: X
Question
XYZ Corp. had operating income this year of $120 million and is in the 40% tax bracket. The firm carried $200 million in debt at a cost of 10% interest. This year's depreciation expense was $30 million. XYZ Corp. has budgeted $40 million in capital spending and an additional $5 million in non-cash working capital. No change is anticipated in the company's net debt. What is XYZ Corp.'s expected free cash flow to equity (FCFE)?
Select one:
A. $15 million
B. $35 million
C. $45 million
D. $57 million
E. None of the above
Explanation / Answer
Income before taxes = Operating income - Depreciation expense - Interest on debt
Income before taxes = $120 million - $30 million - ($200 million * 10%) = $70 million
Tax expense = $70 million * 40% = $28 million
Net income = $70 million - $28 million = $42 million
Free cash flow to equity = Net income + Depreciation expense - Capital spending - Wokring capital investment
Free cash flow to equity = $42 million + $30 million - $40 milllion - $5 million = $27 million
Hence, correct answer is E. None of the above.
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