2. Free Cash Flow vs. Net Income Watson oil recently reported (in s Millions) $8

Question

2. Free Cash Flow vs. Net Income Watson oil recently reported (in s Millions) $8.250 of sales. s5.750 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 federalplus-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 $1.350 of capital expenditures on new fixed assets and to invest $325 in net operating working capital. By how much did the firm's net income exceed its free cash flow? Net Income Millions) Free Cash Flow Millions) Difference between FCF and Net Income Millions) enter your a directly

Explanation / Answer

Answer:

Calculation of Net income of the company:

Sales                                       $8250

Less: Operating costs $5750

Less: Depreciation       $650

Operating Profits $1850

Less: Interest Expense $160

($3200*5%)

Income before Tax $1690

Less: Taxes

($1690*35%)                $591.50

Net Income                   $1098.50

Calculation of Free Cash flows of the company:

Operating Profits                         $1850

Add: Depreciation $650

Less: Capital Expenditure $1350

Less: Working Capital $325

Free Cash Flows           $825

Difference between Free cash flows and Net income

$1098.50 - $825 = $273.50

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