Question

A firm has sales of $10,000, EBIT of $3,000, depreciation of $400, and fixed assets increased by $2,000. If the firm's tax rate is 30 percent and there were no increases in net operating working capital, what is the firm's free cash flow

Answer 1

The correct answer is $500

Step-by-step explanation:

Solution

Given that:

The firm sales =$10,000

EBIT of -= $3000

Depreciation = $400

The firm tax rate is = 30%

Now,

We find the firm's free cash flow which is stated as follows:

The cash flow (free)= EBIT * (1-t) + depreciation + change in working capital

So,

The firm free cash flow = 3000 * (1-30%) + 400 - 2000

= 2100 + 400- 2000

= $500