Question

Cello Inc. is a manufacturer of pianos. It earned an after-tax return on capital of 10% last year and expects to maintain this next year. If the current year's after-tax operating income is $100 million and the firm reinvests 50% of this income, estimate the free cash flow to the firm next year. [After-tax Operating Income = EBIT (1-t)] Your answer should be in millions (input 30 instead of 30,000,000)

Answer 1

Cello Inc.'s estimated free cash flow for the next year is $50 million, calculated by subtracting the reinvestment ($50 million) from the after-tax operating income ($100 million).

Step-by-step explanation:

To calculate the estimated free cash flow to Cello Inc. for next year, we first look at the after-tax operating income which is given as $100 million. Since Cello Inc. reinvests 50% of this income, it means that the reinvestment amount is $50 million ($100 million x 0.5). The free cash flow (FCF) is calculated by subtracting the reinvestment from the after-tax operating income. Thus, the FCF for next year would be $100 million - $50 million = $50 million.