Question

A firm has sales of $690, EBIT of $300, depreciation of $40, and fixed assets increased by $265. If the firm's tax rate is 40 percent and there were no increases in net operating working capital, what is the firm's free cash flow?

Answer 1

Answer:

-$45

Explanation:

Given that,

Sales = $690

EBIT = $300

Depreciation = $40

Tax rate = 40%

Fixed assets increased by $265.

Firm's free cash flow:

= Earnings after tax + Depreciation - Capital Expenditure

= [EBIT × (1 - Tax rate)] + $40 - $265

= [$300 × (1 - 0.40)] + $40 - $265

= $180 + $40 - $265

= -$45

Therefore, the firm's free cash flow -$45.