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Garey, Inc. had sales for 2019 of $500,000, and EBITDA was 25% of sales. Furthermore, depreciation...

Garey, Inc. had sales for 2019 of $500,000, and EBITDA was 25% of sales. Furthermore, depreciation was $13,000, interest was $8,500, the corporate tax rate was 21%, and the company pays 10% of its net income as dividends. Given this information and the balance sheets below, calculate the free cash flow for 2019. a. $92,430 b. $98,080 c. $89,730 d. $91,280 e. None of the above is within $10 of the correct answer.

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Answer #1

While calculating Free Cash Flow refers to the cash available to the company in order to pay creditors and shareholders.

Free Cash Flow :

EBITDA - 25% of 500,000 = 125,000

Less, Depreciation - 13,000

EBIT = 112,000

Less, Tax - 21%

Earning After Interest and Tax - 88,480

Add, Depreciation (As depreciation is non cash expense, so added back) - 13,000

Free Cash Flow = 101,480

Dividend and Interest Income will not be subtracted from FCF as this is the money left to company to pay creditors and shareholders.

So the correct option is "e". None of the above

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