Question

XYZ Corp. had operating income this year of $120 million and is in the 40% tax...

XYZ Corp. had operating income this year of $120 million and is in the 40% tax bracket. The firm carried $200 million in debt at a cost of 10% interest. This year's depreciation expense was $30 million. XYZ Corp. has budgeted $40 million in capital spending and an additional $5 million in non-cash working capital. No change is anticipated in the company's net debt. What is XYZ Corp.'s expected free cash flow to equity (FCFE)?

Select one:

A. $15 million

B. $35 million

C. $45 million

D. $57 million

E. None of the above

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Homework Answers

Answer #1

Income before taxes = Operating income - Depreciation expense - Interest on debt

Income before taxes = $120 million - $30 million - ($200 million * 10%) = $70 million

Tax expense = $70 million * 40% = $28 million

Net income = $70 million - $28 million = $42 million

Free cash flow to equity = Net income + Depreciation expense - Capital spending - Wokring capital investment

Free cash flow to equity = $42 million + $30 million - $40 milllion - $5 million = $27 million

Hence, correct answer is E. None of the above.

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