Greshak Corp. recently reported $18.350 of sales, $9,900 of operating costs othe

Question

Greshak Corp. recently reported $18.350 of sales, $9,900 of operating costs other than depreciation, and $1.250 of depreciation. The company had no amortization charges, it had $4500 of outstanding bonds that carry a 10.0% interest rate, and its federal-plus-state income tax rate was 30%. In order to sustain its operations and thus generate sales and cash flows in the future, the firm was required to spend $2,850 to buy new fixed assets and to invest $1,625 in net operating working capital. How much free cash flow did Greshak generate? Select one: O A. (S 120.00). O B.S 415.00 C. $ 565.00. 0 D. $ 710.00. 0 E. $1,180.00. Next page app

Explanation / Answer

The formula for free cash flow will be

Free cash flow = NOPAT - change in net working capital-capex

NOPAT(Net operating profit after tax)= EBIT(1-tax rate)

Here Revenue= $18,350

Operating Cost= $9,900

Dep. = $1,250

Hence EBIT= 18350-9900-1250= $7200

tax rate =30%

hence NOPAT= EBIT*(1-t)

NOPAT= 7200*(0.7)= $5,040

So free cash flow = 5040- 2850-1625

Free cash flow =$565

hence option C is correct

Thanks

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