Question

Bartling energy system recently reported 9,250,000,000 of sales , $5,750,000,000 of operating costs other than depreciations , and 7000,000,000 of depreciation. The company has no amortization charges, it had $3,200,000,000 of outstanding bonds that carry a 5% interest rate and its federal-plus-state 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 make $1,250,000,000 of capital expenditures on new fixed assets and to invest $300,000,000 in net operating working capital. By how much did the firm’s net income exceed its free cash flow?

Answer 1

So hopefully you meant 700,000,000 in depreciation otherwise this is wrong.

Anyway. First, we find our Pretax Income which is Sales - Operating Costs - Deprecation - Interest expense = Pretax Income

Interest expense is just our bonds times 5% interest rate (325,000,000 times 5%)

We must pay 35% taxes on the pretax income.

Pretax Income - taxes = Net income

Operating cash = Net income + depreciation we do this because deprecation is a non-cash expense.

We must then deduct our Capital expenditures and investment into Working Capital because both of those use up cash. So we reduce operating cash by 1,250,000,000 and 300,000,000 respectively. This leaves us with Free Cash flow and the difference is 850,000,000.

Sales	$9,250,000,000
Op Costs	-55,750,000,000
Dep	-$700,000,000
Interest	-$160,000,000
Pretax Income	$2,640,000,000
Taxes	$924,000,000
Net Income	$1,716,000,000
Net Income	$1,716,000,000
Dep	$700,000,000
Op Cash Flow	$2,416,000,000
Capex	-$1,250,000,000
NWC	-$300,000,000
Free Cash Flow	$866,000,000
Difference	$850,000,000