Question

Champagne, inc., had revenues of $12 million, cash operating expenses of $8 million, and depreciation and amortization of $1.5 million during 2008. the firm purchased $700,000 of equipment during the year while increasing its inventory by $500,000 (with no corresponding increase in current liabilities). the marginal tax rate for champagne is 30 percent. free cash flow: what is champagne's free cash flow for 2008? $4,000,000 $3,250,000 $2,050,000 $2,500,000

Answer 1

Champagne Inc.'s free cash flow for 2008 is $2,300,000.

Step-by-step explanation:

To calculate Champagne Inc.'s free cash flow for 2008, we need to use the formula: Free Cash Flow = Cash Flow from Operations - Capital Expenditures. Cash Flow from Operations = Revenues - Cash Operating Expenses - Depreciation and Amortization = $12 million - $8 million - $1.5 million = $2.5 million. Capital Expenditures = Equipment Purchases - Increase in Inventory = $700,000 - $500,000 = $200,000.

Substituting the values: Free Cash Flow = $2.5 million - $200,000 = $2.3 million.

Therefore, Champagne Inc.'s free cash flow for 2008 is $2,300,000.

Answer 2

The free cash flow can be calculated as below:

Revenue 12000000

Less: Expense (8000000)

Less: Depreciation (1500000)

Earnings Before Tax 2500000

Less Tax (750000)

Earnings after tax 1750000

Add Depreciation 1500000

Total Cash Earnings 3250000

Less: Change in Working Capital (500000)

Less : Purchase of Asset (700000)

Free Cash Flow 2050000

Thus Free Cash Flow can be calculated as above.