Question

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

Answer #1

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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