Question

Beckham Broadcasting Company (BBC) has operating income (EBIT) of $2,500,000. The company's depreciation expense is $500,000 and it has no amortization expense. The company is 100% equity financed. The company has a 40% tax rate, and its net investment in operating capital is $1,000,000.
What is BBC's free cash flow?


a. $0
b. $500,000
c. $900,000
d. $1,000,000
e. $1,500,000

Answer 1

Answer:

The correct answer is option (D).

Explanation:

According to the scenario, the given data are as follows:

Operating Income (EBIT) = $2,500,000

Depreciation Expense =$500,000

Tax rate = 40%

Net investment = $1,000,000

So, we can calculate the BBC's free cash flow by using following formula:

= EBIT × (1 -Tax Rate) + Depreciation & Amortization  - Net investment

Now put these values to the above formula  

So, the value would equal to  

= $2,500,000 × ( 1 - 40%) + $500,000  - $1,000,000

= $1,500,000 + $500,000 - $1,000,000

= $1,000,000