Watson Oil recently reported (in millions) $8,250 of sales, $5,750 of operating costs other than depreciation,...
Watson Oil recently reported (in millions) $8,250 of sales, $5,750 of operating costs other than depreciation, and $1,100 of depreciation. The company 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 future sales and cash flows, 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? Do not round the intermediate calculations.
Homework Answers
Sales = $8,250
Operating Cost = $5,750
EBDIT = $8,250 - $5,750 = $2,500
Depreciation = $1,100
EBIT = EBDIT + Depreciation = $2,500 + $1,100 = $3,600
Interest = $3,200 X 5% = $1600
PBT = $3,600 - $1,600 = $2,000
Tax Rate = 35%
Net Income (PAT) = PBT*(1-Tax Rate) = $2,000*(1-35%) = $1,300 -(i)
Free Cash Flow = EBIT - Taxes + Depreciation & Amortization - Capex – Change in Working Capital
= $3,600 - $2,000*35% + $1,100 - $1,250 - $300
= $2,650 -(ii)
So, the firm's net income exceed its free cash flow by $2,650 - $1,300 = $1,350 (Using i & ii)
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