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In: Finance
Dino Drilling recently reported $8,250 of sales, $4,500 ofoperating costs other than depreciation, and $950...
Dino Drilling recently reported $8,250 of sales, $4,500 of operating costs other than depreciation, and $950 of depreciation. The company had no amortization charges, it had $3,250 of outstanding bonds that carry a 6.75% interest rate, and its combined federal and provincial income tax rate was 35%. In order to sustain its operations and thus generate sales and cash flows in the future, the firm was required to spend $750 to buy new fixed assets and to invest $250 in net operating working capital. How much free cash flow did Dino Drilling generate?
Solutions
Expert Solution
The free cash flow is computed as shown below:
= [ Sales - Operating cost other than depreciation - depreciation) x (1 - tax rate) ] + depreciation - purchase of new fixed assets - investment in net operating working capital
= [ $ 8,250 - $ 4,500 - $ 950) x (1 - 0.35) ] + $ 950 - $ 750 - $ 250
= $ 2,800 x 0.65 - $ 50
= $ 1,820 - $ 50
= $ 1,770
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