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 5% interest rate, and its federal-+-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?

Answer 1

Answer: Difference between net income and FCF =  $746.00

Explanation:

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) = $2,800.00

Interest charges = $160.00

Taxable income (EBT) = $2,640.00

Taxes =  $924.00

Net income after taxes = $1,716.00

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

FCF = $1,820 + $700 – $1,250 – $300

FCF =  $970.00

Difference between net income and FCF =  $746.00