Question

Houston pumps recently reported $185,250 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?

a. $10,225
b. $10,736
c. $11,273
d. $11,837
e. $12,429

Answer 1

ANSWER: a
RATIONALE: Shares outstanding 530,000
Price per share $27.50
Total book common equity $5,125,000
Book value per share = Total book equity/Number of shares $9.67
Difference between book and market values $17.83

Answer 2

The answer is a. $10,225

Step-by-step explanation:

The solution involves two steps. The first step is the calculation of net operating profit after tax (NOPAT) while the second step is the calculation of free cash flow.

Step 1 - Calculation of NOPAT

Sales $185,250

Operating costs ($140,500)

Depreciation ($9,250)

Operating profit $35,500

Tax (35%) ($12,425)

NOPAT $23,075

Step 2 - Calculation of free cash flow

NOPAT $23,075

Depreciation $9,250

Changes in working capital ($6,850)

Capital expenditure ($15,250)

Free cash flow $10,225