Question

In: Finance

johnson's nursery has net income of 42,500, depreciation expense of 2500, interest expense of 1000 ,...

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?

Expert Solution

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

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