Question

20

In the current year, a company reported cash flow from operating activities of $100,000, cash flow from investing activities of ($60,000), and cash flow from financing activities of ($40,000). In addition, the company paid interest of $20,000, had net capital expenditures of $50,000, and issued net new debt of $15,000. The marginal tax rate is 35%. Compute the free cash flow to the firm for the current year.

Answer 1

Solution:-

Free Cash Flow of the Firm

Free cash flow of the firm means,It is the cash available to pay investors after a company pays its cost of doing business,Invest in short term assets like Inventory and Invests in Long term assets like property,plant and machinery.

Formula for Free Cash Flow(FCF) of the Firm

FCF=CFO+i*(1-T)-CE

CFO=Cash Flow from Operating Activities=$100,000

i=Interest Expense=$20,000

T=Tax Rate=35%

CE=Net capital Expenditure(Capital Expenditure Less Depreciation)=$50000

Free Cash Flow of the Firm

Particulars	Amount in $
Cash Flow From Operating Activities	100,000
Add:Interest(i*(1-T)20000*65%	13,000
Less:Net Capital Expenditure	50,000
Free Cash Flow of the Firm	63,000