Question

1. AT&T recently reported (in millions) $8,250 of sales, $5,750 of operating costs other than depreciation, and $1,100 of depreciation. The company had $3,200 of outstanding bonds that carry a 5% 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 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? Do not round the intermediate calculations.

Answer 1

Net income is computed as follows:

= (Sales - operating cost other than depreciation - depreciation - interest expense) x (1 - tax rate)

= ($ 8,250 million - $ 5,750 million - $ 1,100 million - $ 3,200 million x 5%) x (1 - 0.35)

= $ 806 million

Free cash flow is computed as follows:

= (Sales - operating cost other than depreciation - depreciation) x (1 - tax rate) + depreciation - Expenditure on new fixed assets - Expenditure on net operating working capital

= ($ 8,250 million - $ 5,750 million - $ 1,100 million) x (1 - 0.35) + $ 1,100 - $ 1,250 million - $ 300 million

= $ 460 million

So, the excess amount will be as follows:

= $ 806 million - $ 460 million

= $ 346 million