Question

4. Veazy Plumbing recently reported $8,250 of sales, $4,500 of operating costs other than depreciation, and $950 of depreciation. The company had no amortization charges. It had $3,250 of outstanding bonds that carry a 6.75% interest rate, and its federal-plus-state income tax rate was 35%. In order to sustain its operations, the firm was required to spend $750 to buy new fixed assets and to invest $250 in net operating working capital. How much free cash flow did Veazy generate?

Answer #1

Sales = $ 8250

Less: Operating Costs = $ 4500

EBITDA = $ 3750

Less: Depreciation = $ 950

EBIT = $ 2800

Less: Interest Expense = Outstanding Bonds x Interest Rate = 3250 x 0.0675 = $ 219.375

Earnings Before Tax (EBT) = $ 2580.625

Less: Tax Expense @ 35 % = 0.35 x 2580.625 = $ 903.2188

Net Income = $ 1677.406

Add: Depreciation = $ 950

Add: After-Tax Interest Expense = 219.375 x (1-0.35) = $ 142.5938

Less: Investment in Fixed Assets = $ 750

Less: Investment in Net Operating Working Capital = $ 250

Free Cash Flow to Firm = $ 1770

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