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Smith Inc. recently reported operating income of $2.75 million, depreciation of $1.20 million, and had a...

Smith Inc. recently reported operating income of $2.75 million, depreciation of $1.20 million, and had a tax rate if 40%. The company’s expenditures on fixed assets (CAPEX) and net operating capital totaled $1.6 million. How much was its free cash flow, in millions?

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Answer #1

Free cash flow to the firm (FCFF) = Net Operating Profit after Tax (NOPAT) + Depreciation - CAPEX - Working Capital investment

Operating income or EBIT is $2.75 million

NOPAT = Operating income x (1 - Tax rate)

NOPAT =  $2.75 million x (1 - 0.40) (tax rate is given as 40%)

= $1.65 million

We are given the total combined expenditure on CAPEX and net operating capital (i.e., Working capital) = $1.6 million

Depreciation =  $1.20 million

Therefore, Free cash flow to the firm (FCFF) =  $1.65 million + 1.20 million - 1.6 million = $1.25 million

Smith Inc.'s Free cash flow is $1.25 million

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