Question

Greshak Manufacturing Co. recently reported $8,250 of sales, $4,500 of operating costs other than depreciation, and $950 of depreciation. The company had no amortization charges, it had $3,500 of outstanding bonds that carry a 6.0% interest rate, and its federal-plus-state income tax rate was 23%. In order to sustain its operations and thus generate sales and cash flows in the future, the firm was required to spend $825 to buy new fixed assets and to invest $315 in net operating working capital. How much free cash flow did Greshak generate

Answer 1

$1,966

Step-by-step explanation:

Calculation for How much free cash flow did Greshak generate

First step is to calculate the operating income (EBIT)

Sales $8,250

Less Operating costs $4,500

Less Depreciation $950

Operating income (EBIT) $2,800

($8,250-$4,500-$950)

Now let calculate the free cash flow using this formula

Free Cash Flow = EBIT(1 *Tax rate) + Depreciation -Required Capital Expenditure (Fixed assets)- Required addition to Net operating working capital.

Let plug in the formula

Free Cash Flow = [$2,800(1-23%)] + $950 -$825- $315

Free Cash Flow=($2,800*0.77)+$950-$825-$315

Free Cash Flow = $2,156+$950-$825-$315

Free Cash Flow=$1,966

Therefore amount of free cash flow that Greshak generate is $1,966