Question

Catering Corp. reported free cash flows for 2008 of $8.01 million and investment in operating capital of $2.01 million. Catering listed $1.01 million in depreciation expense and $2.01 million in taxes on its 2008 income statement. What was Catering's 2008 EBIT?

Answer 1

EBIT = $11.02 million.

Step-by-step explanation:

Firstly, let recall the formula for free cash flow (FCF):

FCF = NI + NCC + Int x (1 - t) - WCInV - FCInv, where:

NI: Net income.

NCC: Non-cash charge, which is depreciation expense in this case;

Int: Interest expense, which is 0 in this case;

t: Tax rate

WCInV: Working capital investment

FCInv: Fixed capital investment

Now let transform the above formula a bit:

8.01 = NI + Int x (1 - t) + NCC - WCInV - FCInv

= (EBIT - Int) x (1 - t) + Int x (1 - t) + NCC - WCInV - FCInv

= (EBIT - 0) x (1 - t) + 0 x (1 - t) + NCC - WCInV - FCInv

= EBITx (1 - t) + NCC - WCInV - FCInv

= EBIT - Tax expense + NCC - WCInV - FCInv

= EBIT - 2.01 + 1.01 - 2.01

Solve the equition we get EBIT = $11.02 million.