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

Question

Business

Wiggins

25 April, 22:10

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

+1

Answers (1)

Know the Answer?

Triston Haynes · Answer 1

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.