Question

You have gathered this information on a firm: $500,000 sales, $10,000 cash dividends, $300,000 cost of goods sold, $20,000 administrative expense, $20,000 depreciation expense, $40,000 interest expense, $10,000 purchase of productive equipment, no changes in working capital, and a tax rate of 21%. What is the free cash flow

Answer 1

Answer:

Free Cash flow                                               $144,800    

Explanation:

The question is to determine the free cash flow for the firm

This is done as follows

First we calculate the earnings before interest and tax (EBIT)

EBIT = Sales - Cost of Goods sold - Administrative expenses - Depreciation expenses

= $500000 - $300,000 - $20,000 - $20,000 = $160,000

Secondly, we calculate the Taxes by subtracting the interest from the EBIT and then finding 21% tax rate

= $160,000 - $40,000= $120,000 x 0.21  = $25,200

So, Free Cash Flow

EBIT                                                             $160,000

Less: Taxes                                                    25,200

Net incomes before Interest                      $134,800

Add: Depreciation                                         $20,000

Less: Capital expenditure (equipment)      ($10,000)

No changes in Net Working Capital            (0)

Free Cash flow                                               $144,800        

Answer 2

Free Cashflow is $144,800 and the computation of free cash flow is shown in the image below.

What is free cash flow?

Free cash flow is also called free cash flow to a firm. It is the amount by which an operating cash flow of a business surpasses its working capital requirements and expenditures on fixed assets.

To compute free cash flow,

First, we calculate the earnings before interest and tax (EBIT):

According to the given information,

Sales =$500,000

Cost of Goods Sold = $300,000

Administrative Expenses = $20,000

Depreciation Expenses = $20,000

$\text{EBIT} = \text{Sales} - \text{Cost of Goods Sold- Administrative Expenses - Depreciation Expenses}\\\\\text{EBIT} = \ 500,000 -\ 300,000 - \ 20,000 - \ 20,000\\\\\text{EBIT} = \ 160,000$

Now, compute the taxes by deducting the interest from the EBIT and then finding the 21% tax rate.

$=\text{EBIT- Interest Expense}\\=\ 160,000 - \ 40,000\\=120,000$

$=\ 120,000\times 20\%\\=\ 24,000$

Now, the computation of free cash flow is given in the image below.

Learn more about the free cash flow, refer to:

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