Question

Houston Pumps recently reported $220,000 of sales, $140,500 of operating costs other than depreciation, and $9,250 of depreciation. The company had $35,250 of outstanding bonds that carry a 6.75% interest rate, and its federal-plus-state income tax rate was 35%. In order to sustain its operations and thus generate future sales and cash flows, the firm was required to spend $15,250 to buy new fixed assets and to invest $6,850 in net operating working capital. What was the firm's free cash flow?

Answer 1

Answer: $32,813

Explanation: The amount of funds available in a corporate entity for distribution to all of its security holders is termed as free cash flow to the firm. It is used as a measure of company's profitability after all expenses are paid.

formula :-

free cash flow = EBIT + Depreciation- capital expenditure - working capital

where,

EBIT= sales - operating cost- depreciation

= 220,000 - 140,500 - 9,250

= 70,250

now putting values into equation :-

free cash flow = 70,250(1-35%) + 9,250 -15,250 - 6,850 = $32,813

Answer 2

The free cash flow for the firm would be $32,812

Step-by-step explanation:

In this question we have been given the

total sales = $220,000

operating cost ( without deprecation) = $140,500

depreciation cost = $9250

income tax rate = 35%

capital expenditure(amount invested in fixed asset) = $15,250

investment made in net working capital = $6850

Here our first step should be to calculate the EBIT which is the earnings before interest and tax, for calculating this we will subtract the operating and depreciation cost from the total sales of the company,

EBIT = total sales - operating cost - depreciation

= $220,000 - $140,500 - $9250

= $70,250

After this we will subtract the federal plus income tax from this EBIT to get EBAT,

EBAT = $70,250 - 35% x $70,250

= $70,250 - $24,588 ( the original amount was $24587.5 but we

took approximate)

= $ 45,662

Now we will add back the depreciation in it and subtract the investment made in capital expenditure and net operating working capital cost(OWCC)

FREE CASH FLOW = EBAT + Depreciation - Capital expenditure - OWCC

= $45,662 + $9250 - $15,250 - $ 6850

= $32,812