The following table shows an abbreviated income statement and balance sheet for

Question

The following table shows an abbreviated income statement and balance sheet for Quick Burger Corporation for 2016.

In 2016 Quick Burger had capital expenditures of $3,069.

b. If Quick Burger was financed entirely by equity, how much more tax would the company have paid? (Assume a tax rate of 35%.) (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)

c. What would the company’s free cash flow have been if it was all-equity financed?

INCOME STATEMENT OF QUICK BURGER CORP., 2016 (Figures in $ millions) Net sales $ 27,587 Costs 17,589 Depreciation 1,422 Earnings before interest and taxes (EBIT) $ 8,576 Interest expense 537 Pretax income 8,039 Taxes 2,654 Net income $ 5,385

Explanation / Answer

b) If the company was all equity financed, it would not have paid the interest expense, which means its EBT would be equal to its EBIT of $8,576 million.

Tax = $8,576 x 35% = $3001.60 million

Extra tax paid = $3001.60 - $2,654 = $347.60

c) Free Cash flows = Net Income + Depreciation - Capital Expenditures

Net Income for if company was all equity financed = $8576 - $3001.60 = $5574.40

Free Cash flows = $5574.40 + $1422 - $3069 = $3927.40

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