Bartling Energy Systems recently reported $9,250 of sales, $5,750 of operating c
ID: 2671683 • Letter: B
Question
Bartling Energy Systems recently reported $9,250 of sales, $5,750 of operating costs other thandepreciation, and $700 of depreciation. The company had no amortization charges, it 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 sales and cash flows in the future, 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?
Explanation / Answer
Bonds ------------ $3,200.00
Interest rate ---------- 5.00%
Tax rate ---------------- 35.00%
Required capital expenditures (fixed assets) -------------- $1,250.00
Required addition to net operating working capital------------ $300.00
Sales -------------- $9,250.00
Operating costs excluding depr'-------------- $5,750.00
Depreciation ------ $700.00
Operating income (EBIT) $2,800.00
Interest charges $160.00
Taxable income (EBT) $2,640.00
Taxes $924.00
Net income after taxes $1,716.00
FCF = BIT(1 – T) + Depr – Cap Ex – Net Op WC
FCF = $1,820 + $700 – $1,250 – $300
FCF = $970.00
Difference between net income and FCF = $746.00
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