Greshak Corp. recently reported $18,350 of sales, $9,900 of operating costs othe
ID: 2815448 • Letter: G
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 changes it had $4,500 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 this 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?
$120.00
$415.00
$565.00
$710.00
$1,180.00
Explanation / Answer
Net Operating profit after taxes (NOPAT) = EBIT x ( 1 - Taxes) = $7200 x (1 - 30%) = $5040
Free cash flow = NOPAT + Depreciation - Capital spending - net working capital spending
or, Free cash flow = $5175 - $2850 - $1625 = $565
[ Actual answer should be $1815 as you have to add depreciation of $1250 back to it since it is a non-cash item. Recheck the options and/ or the question data ]
Sales $18350 Less: Operating costs $9900 Less: Depreciation $1250 EBIT $7200 Less: Interest ($4500 x 10%) $450 EBT $6750 Less: Tax@30% $2025 Net Income $4725Related Questions
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