Houston Pumps recently reported $220,000 of sales, $140,500 of operating costs o

Question

Houston Pumps recently reported $220,000 of sales, $140,500 of operating costs other than depreciation, and $9,250 of depreciation. The company had $35,250 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 future sales and cash flows, the firm was required to spend $15,250 to buy new fixed assets and to invest $6,850 in net operating working capital. What was the firm's free cash flow?

$32,813

$38,719

$26,906

$31,828

$36,422

$32,813

$38,719

$26,906

$31,828

$36,422

Explanation / Answer

Tax rate 35%
Required addition to net working capital $6,850
Required capital expenditures (fixed assets) $15,250

Sales $185,250
Operating costs excluding depreciation 140,500
Depreciation 9,250
Operating income (EBIT) $ 35,500

FCF = EBIT * (1 - T) - ? NFA - ? CA + ? CL

? NFA = ? Capex - Deprec, ? NWC = (? CA - ? CL)

FCF = EBIT * (1-T) - (? Capex - Deprec) - (? CA - ? CL) = EBIT * (1-T) - ? Capex + Deprec - ? NWC
FCF = EBIT*(1

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