Suppose you are the only owner of a chain of coffee shops near universities. You

ID: 2335424 • Letter: S

Question

Suppose you are the only owner of a chain of coffee shops near universities. Your current cafes are doing well, but you are interested in starting a fine-dining restaurant. You decide to use the cash generated from your existing business to enter into a new business. Your accountant provides you with the following data on your current financial performance Financial update as of June 15 Your existing business generates $147,000 in EBIT. . The corporate tax rate applicable to your business is 35%. The depreciation expense reported in the financial statements is $28,000. You don't need to spend any money for new equipment in your existing cafes; however, you do need $22,050 of additional caslh napkins, and more formal tableware-on credit. by $7,350 You also need to purchase $11,760 in additional supplies-such as cloth tableclothes and It is also estimated that your accruals, including taxes and wages payable, will increase Based on your evaluation you have in free cash flow. Can a company have negative free cash flow? O Yes O No

Explanation / Answer

Answer;

Computation of free cash flow

EBIT

147000

Less: Income Tax (35% x 147000)

51450

Net income after tax

95550

Add: Depreciation Expanses

28,000

123,550

Working capital changes

Increase in accruals (Taxes and wages payable)

7350

Less: working capital requirement

-22050

-14700

Free cash flow

108,850

Based on the evaluation, the amount of free cash flow is =$ 108,850

can company have negative free cash flow

Answer: NO