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Answer to Question #16715 in Finance for Sky

Question #16715
. 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?
Expert's answer
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 depr'n $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) + 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

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