Watson Oil recently reported (in millions) $8,250 of sales, $5,750 of operating costs other than depreciation, and $800 of depreciation. The company had $3,200 of outstanding bonds that carry a 5% interest rate, and its federal-plus-state income tax rate was 35%. In order to sustain its operations and thus generate future sales and cash flows, the firm was required to make $1,250 of capital expenditures on new fixed assets and to invest $300 in net operating working capital. By how much did the firm's net income exceed its free cash flow? Do not round the intermediate calculations. a. $601 b. $646 c. $717 d. $633 e. $808
Sales = $ 8250
Less: Operating Costs = $ 5750
EBITDA = $ 2500
Less: Depreciation = $ 800
EBIT = $ 1700
Less: Interest Expense = Interest Rate x Outstanding Bonds = 0.05 x 3200 = $ 160
EBT = $ 2340
LessL Tax @ 35% = 0.35 x 2340 = $ 819
Net Income = $ 1521
Add: Depreciation = $ 800
Add: After-Tax Interest Expense = (1-0.35) x 160 = $ 104
Less: Investment in Fixed Assets = $ 1250
Less: Net Operating Working Capital = $ 300
Free Cash Flow to Firm (FCFF) = $ 875
Difference between Net Income and Free Cash Flow = 1521 - 875 = $ 646
Hence, the correct option is (b)
Hence, the correct option is (e)
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