Question

Consider a company with earnings before interest and taxes (EBIT) of $761,000, tax rate of 15%, and reinvestment rate of 66%. How much is its free cash flow during that period?

Answer 1

The free cash flow is calculated as net income minus reinvested amount. Given an EBIT of $761,000, a 15% tax rate, and 66% reinvestment rate, the free cash flow for the period is $219,929.

Step-by-step explanation:

To calculate the free cash flow during the period for a company with earnings before interest and taxes (EBIT) of $761,000, a tax rate of 15%, and a reinvestment rate of 66%, we need to follow these steps:

1. Determine the net income by subtracting taxes from EBIT.
2. Calculate the amount reinvested into the company.
3. Deduct the reinvested amount from the net income to obtain the free cash flow.

First, we calculate the net income:
Net Income = EBIT - (EBIT * Tax Rate)

Net Income = $761,000 - ($761,000 * 0.15) = $761,000 - $114,150 = $646,850

Next, we calculate the amount reinvested:
Reinvested Amount = Net Income * Reinvestment Rate

Reinvested Amount = $646,850 * 0.66 = $426,921

Finally, we determine the free cash flow by subtracting the reinvested amount from the net income:

Free Cash Flow = Net Income - Reinvested Amount = $646,850 - $426,921 = $219,929