Watson Oil recently reported (in millions) $8,250 of sales, $5,750 of operating
ID: 2626965 • Letter: W
Question
Watson Oil recently reported (in millions) $8,250 of sales, $5,750 of operating costs other than depreciation, and $650 of depreciation. The company had $3,200 of outstanding bonds that carry a 5% interest rate, and its federal-plus-state income tax rate was 35%. In order to sustain its operations and thus generate future sales and cash flows, the firm was required to make $1,250 of capital expenditures on new fixed assets and to invest $300 in net operating working capital. By how much did the firm's net income exceed its free cash flow?
a. $836 b. $878 c. $718 d. $796 e. $756Explanation / Answer
Sales 8250 FCFF Rent 0 NI 1098.5 Total Revenue 8250 non cash charges 650 Capex -1250 COGS 5750 WC -300 Int Exp 160 198.5 Dep 650 Int(1-T) 104 Selling exp 0 302.5 Total Cost 6560 Profit= 1690 Tax 591.5 Net income 1098.5 Diff 796
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