Question

Watson's lawn mowing service recently reported (in millions) $8,250 of sales, $5,750 of operating costs other than depreciation, and $650 of depreciation. There was company had $3,200 of outstanding bonds that carry a 5% interest rate which led to an interest expense of $160, and its tax rate was 40%. In order to sustain its operations, the firm was required to make $1,250 of capital expenditures and its change in net operating working capital was $300. By how much did the firm's net income exceed its free cash flow?

Answer 1

Answer:

Thenet income exceed its FCF by $806

Explanation:

First we calculate net income as usual

8250 sales revenue

-5,750 cash expense

-650 dep expense

1850 Earning before Interest and taxes

-160 interest expense

1,690

-676 income tax expense

1014 Net Income

Next we calculate the cash flow

IMPORTANT DISCLOSURE:

There are severals methods to calculate the FCF  I'm gonna solved using my personal opinion, based on the givens you have.

Net Profit 1,014

- Inertest expense (1-tax) 94

+ Depreciation 650

- Net Capital Expenditure  (1,250)

- Net changes in Working Capital    (300)

Free Cash Flow = 208

1,014 - 208 = 806