Question

Watson Oil recently reported (in millions) $8,250 of sales, $5,750 of operating costs. 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 $600 of capital expenditures on operating long-term 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:

$796

Explanation:

The computation of the excess amount is shown below:

As we know that

Free cash flows = Net Income + Depreciation + Interest (1-tax) - Capital expenditures  +- changes in Working capital

Now the difference could be determined by the following formula

-Depreciation - interest (1-tax) + capital expenditure + changes in Working capital

= -$650 - 0.05 × $3,200 × (1 - 0.35) + $1,250 + $300

= $796