Question

- 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**

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