Question

# AT&T recently reported (in millions) \$8,250 of sales, \$5,750 of operating costs other than depreciation, and...

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.

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

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