Question

"You are considering an investment in the FIN340 Company and want to evaluate the firm's free cash flow; From the income statement, you see that FIN340 Company earned an EBIT of $1,725,000, paid taxes of $326,025, and its depreciation expense was $86,250; FIN340 Company's gross fixed assets increased by $500,000 from 2017 to 2018. The firm's current assets increased by $545,000 and spontaneous current liabilities increased by $97,000 - What is FIN340 Company's free cash flow in 2018?

A. "$170,725
B. "$450,975
C. "$1,398,975
D. "$1,485,225
E. "$364,725
D. "$537,225

Answer 1

D

Step-by-step explanation:

Free cash flow is the cash flow available to all the providers of capital of a firm

FCF = EBIT ( 1 - Tax rate) + deprecation - fixed capital - working capital

Tax rate = $326,025 / $1,725,000 = 18.9%

$1,725,000(1 - 0.189) + $86,250 - $500,000 - ( $545,000 - $97,000)

= $537,225