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Greshak Corp. recently reported $18,350 of sales, $9,900 of operating costs other than depreciation, and $1,250...

Greshak Corp. recently reported $18,350 of sales, $9,900 of operating costs other than depreciation, and $1,250 of depreciation. The company had no amortization changes it had $4,500 of outstanding bonds that carry a 10.0% interest rate, and its federal-plus-state income tax rate was 30%. In order to sustain its operations and this generate sales and cash flows in the future, the firm was required to spend $2,850 to buy new fixed assets and to invest $1,625 in net operating working capital. How much free cash flow did Greshak generate?

$120.00

$415.00

$565.00

$710.00

$1,180.00

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Answer #1
Sales $18350
Less: Operating costs $9900
Less: Depreciation $1250
EBIT $7200
Less: Interest ($4500 x 10%) $450
EBT $6750
Less: Tax@30% $2025
Net Income $4725

Net Operating profit after taxes (NOPAT) = EBIT x ( 1 - Taxes) = $7200 x (1 - 30%) = $5040

Free cash flow = NOPAT + Depreciation - Capital spending - net working capital spending

or, Free cash flow = $5175 - $2850 - $1625 = $565

[ Actual answer should be $1815 as you have to add depreciation of $1250 back to it since it is a non-cash item. Recheck the options and/ or the question data ]

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