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