Question

Parbonetti Corporation recently reported $8,250 of sales, $4,500 of operating costs other than depreciation, and $950 depreciation. The company had no amortization charges, it had $3,250 of outstanding bonds that carry a 6.75% 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, Parbonetti Corporation was required to spend $750 to buy new fixed assets and invest $250 in net operating working capital.
Required:
How much free cash flow did Wells generate?

Answer 1

How much free cash flow did Wells generate is $1,770

First step is to Determine the Operating income (EBIT)

Sales $8,250

Less Operating costs excluding depreciation ($4,500)

Less Depreciation ($950)

Operating income (EBIT)$2,800

($8,250-$4,500-$950)

Now let determine How much free cash flow did Wells generate using this formula

FCF = EBIT(1 -Tax rate) + Depreciation- Required capital expenditures -Required addition to net operating working capital

Let plug in the formula

FCF = $2,800×(1-0.35)+$950 -$750 -$250

FCF = $2,800×(0.65)+$950 -$750 -$250

FCF = $1,820 + $950 -$750 -$250

FCF = $1,770

Inconclusion How much free cash flow did Wells generate is $1,770

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