Question

johnson's nursery has net income of 42,500, depreciation expense of 2500, interest expense of 1000 , taxes of 1600, additions to net working capital of 2600, cash dividends of 4200 and capital Expedientes 11,400 what is the amount of free cash flow?

Answer 1

Solution :

Calculation of Earnings before Interest Tax :

The formula for calculating the Earnings before Interest Tax is

EBIT = Net Income + Taxes + Interest Expense

As per the Information given in the question we have

Net Income = $ 42,500 ; Interest Expense = $ 1,000   ; Taxes = $ 1,600 ;

Applying the available information we have the EBIT as

= $ 42,500 + $ 1,000 + $ 1,600

= $ 45,100

Thus the EBIT = $ 45,100

Calculation of free cash flow :

The formula for calculating the free cash flow to firm is

= EBIT – Taxes + Depreciation – Change in net working capital - Capital expenditure

As per the information given in the question we have

EBIT = $ 45,100 ; Taxes = $ 1,600 ; Depreciation = $ 2,500 ; Capital expenditure = $ 11,400   ;

Change in net working capital = Addition to net working capital = $ 2,600   ;

Applying the above information in the formula we have

= $ 45,100 - $ 1,600 + $ 2,500 - $ 2,600 - $ 11,400

= $ 32,000

Thus the amount of free cash flow is = $ 32,000