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25 February, 08:36

Wells Water Systems 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 federal-plus-state income tax rate was 25%. 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 Wells generate

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  1. 25 February, 10:08
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    The free cash flow that Wells generated is $2050.

    Explanation:

    EBIT = sales - operating costs - depreciation

    = $8,250 - $4,500 - $950

    = $2,800

    free cash flow

    = EBIT (1 - t) + depreciation - investment in fixed assets - investment in NOWC

    = $2100 + $950 - $750 - $250

    = $2050

    Therefore, The free cash flow that Wells generated is $2050.
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