Question

Houston Pumps recently reported $222,500 of sales, $140,500 of operating costs other than depreciation, and $9,250...

Houston Pumps recently reported $222,500 of sales, $140,500 of operating costs other than depreciation, and $9,250 of depreciation. The company had $35,250 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 and thus generate future sales and cash flows, the firm was required to spend $15,250 to buy new fixed assets and to invest $6,850 in net operating working capital. What was the firm's free cash flow?

a.

$33,060

b.

$26,517

c.

$39,948

d.

$27,894

e.

$34,438
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Answer #1

SOLUTION:-

option e. $34438 is the correct answer.the calculation is as following:-

For findings the firms free cash flow we need to find  net operating profit after tax

Calculation of net operating profit after tax

Sales $222500

Operating costs ( $140500)

Depreciation ( $9250)

Operating profit $72750

Tax ($25462.5)

net operating profit after tax = $447287.5

calculation of free cash flow

  net operating profit after tax        $447287.5

   Depreciation $9250

Changes in working capital ($6850)

Capital expenditure ($15250)

Free cash flow    $34438

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