Shrives Publishing recently reported Sales $9,750.00 Operating costs excluding depreciation 4,500.00 Depreciation 1,250.00 Operating income (EBIT) $ 4,000.00 During the year, the firm had expenditures on fixed assets and net operating working capital that totaled $1,550. These expenditures were necessary for it to sustain operations and generate future sales and cash flows. What was its free cash flow

Complete Question

Shrives Publishing recently reported $9,750 of sales, $4,500 of operating costs, and $1,250 of depreciation. The company had no interest expense, and its income tax rate was 35%. During the year, the firm had expenditures on fixed assets and net operating working capital that totaled $1,550. These expenditures were necessary for it to sustain operations and generate future sales and cash flows. What was its free cash flow

$2,300  

Explanation:

The formula to calculate Free cash flow, we will use the following formula:

Free Cash Flow = EBIT (STEP1)* (1 - Tax Rate)   +   Depreciation   -   Capital Investment   -   Investment in Working Capital  

Here

Depreciation is $1,250

Investment in Capital and working capital is $1,550

EBIT is $4,000

Tax rate is 35%

By putting values, we have:

Free Cash Flow = $4,000 * (1 - 35%)   +  $1,250  -  $1,550

Free Cash Flow = $2,300

STEP 1: Find Earnings Before Interest and Tax

EBIT = Sales - Operating Expense Before Depreciation  -  Depreciation

EBIT = $9,750 - $4,500  -  $1,250 = $4,000

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