Question

Bartling Energy Systems recently reported $9,250 of sales, $5,750 of operating costs other than depreciation, and $700 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.$822.47

b.$708.70

c.$746.00

d.$725.20

e.$673.27

Answer 1

Ans.

Bonds = $3,200.00

Interest rate = 5.00%

Tax rate = 35.00%

Required capital expenditures (fixed assets) = $1,250.00

Required addition to net operating working capital = $300.00

Sales = $9,250.00

Operating costs excluding depreciation = $5,750.00

Depreciation = $700.00

Operating income (EBIT) = $ 9,250 - $ 5,750 - $ 700 = $2,800.00

Interest charges = $ 3,200 * 5% =  $160.00

Taxable income (EBT) = $ 2,800 - $ 160 = $2,640.00

Taxes = $ 2,640 * 35 % = $924.00

Net income after taxes = $ 2,640 - $ 924 = $1,716.00

FCF = EBIT×(1 – T) + Depreciation – Cap Ex – ΔNet Op WC

FCF = $1,820 + $700 – $1,250 – $300

FCF = $970.00

Difference between net income and FCF = $ 1,716 - $ 970 = $746.00

So correct option is C - $ 746.