Answer to Question #11713 in Management for John

Question

5. 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-plus-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?
a. $673.27
b. $708.70
c. $746.00
d. $783.30
e. $822.47

Answer 1

The answer is C.
$746.00

Sales
$9,250.00
Operating costs excluding depr.
$5,750.00
Depreciation
$700.00
Outstanding 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
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) + Depr'n – Cap Ex – Δ Net Op WC
FCF =
$1,820 + $700 – $1,250 – $300
FCF = $970.00
Difference between net income
and FCF = $746.00