Question

# Bartling Energy Systems recently reported \$9,250 of sales, \$5,750 of operating costs other than depreciation, and...

Bartling Energy Systems recently reported \$9,250 of sales, \$5,750 of operating costs other than depreciation, and \$800 of depreciation. The company had no amortization charges, it had \$3,200 of outstanding bonds that carry a 6% interest rate, and its federal-plus-state income tax rate was 35%. In order to sustain its operations and thus generate sales and cash flows in the future, the firm was required to make \$1,250 of capital expenditures on new fixed assets and to invest \$300 in net operating working capital. By how much did the firm's net income exceed its free cash flow?

a.\$746.00

b.\$708.70

c.\$625.20

d.\$822.47

e.\$725.20

Calculation of net income:

EBIT = Sales - operating costs - depreciation
= \$9,250 - \$5,750 - \$800
= \$2,700

EBT = EBIT - Interest = \$2,700 - (\$3,200 * 6%) = \$2,508

Net income = EBT * (1 - tax rate) = \$2,508 * (1 - 0.35) = \$1,630.20

Calculation of free cash flow to firm:

Free cash flow to firm = EBIT * (1 - tax rate) + depreciation - New fixed assets purchased - Investment in net working capital
= \$2,700 * (1 - 0.35) + \$800 - \$1,250 - \$300
= \$1,005

Excess net income over free cash flow = \$1,630.20 - \$1,005 = \$625.20

Excess net income over free cash flow = \$625.20

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