Complete Question
Shrives Publishing recently reported $9,750 of sales, $4,500 of operating costs, and $1,250 of depreciation. The company had no interest expense, and its income tax rate was 35%. During the year, the firm had expenditures on fixed assets and net operating working capital that totaled $1,550. These expenditures were necessary for it to sustain operations and generate future sales and cash flows. What was its free cash flow
Answer:
$2,300
Explanation:
The formula to calculate Free cash flow, we will use the following formula:
Free Cash Flow = EBIT (STEP1)* (1 - Tax Rate) + Depreciation - Capital Investment - Investment in Working Capital
Here
Depreciation is $1,250
Investment in Capital and working capital is $1,550
EBIT is $4,000
Tax rate is 35%
By putting values, we have:
Free Cash Flow = $4,000 * (1 - 35%) + $1,250 - $1,550
Free Cash Flow = $2,300
STEP 1: Find Earnings Before Interest and Tax
EBIT = Sales - Operating Expense Before Depreciation - Depreciation
EBIT = $9,750 - $4,500 - $1,250 = $4,000