Respuesta :
Answer:
$20,000
Explanation:
Free cash flow refers to the cash generated by a company after capital expenditure (CAPEX) on fixed assets is deducted from the cash it generated from its operating activities. Free cash flow can be expressed as follows:
Free cash flow = COA - CAPEX ....................................... (1)
Where COA denotes cash generated from operating activities
From the question, cash from operating activities (COA) can be obtained after adjusting Earning Before Interest and Tax (EBIT) for increase in net current assets of $100,000, an increase in spontaneous current liabilities of $400,000, a depreciation expense of $50,000, and a tax rate of 30%.
While an increase in spontaneous current liabilities of $400,000 and depreciation expense of $50,000 will be added to EBIT because they are cash inflows, increase in net current assets of $100,000 and a tax based on a tax rate of 30% on EBIT (i.e. 30% × $100,000 = $30,000) will be deducted from EBIT because they are cash outflows in order to obtain the COA. Therefore, COA can be calculated as follows:
COA = $100,000 + ($400,000 + $50,000) - ($100,000 + $30,000)
= $100,000 + $450,000 - $130,000
COA = $420,000
Substituting $320,000 for COA and a change in net fixed assets of $400,000 which CAPEX and cash outflow into equation (1), we have:
Free cash flow = $420,000 - $400,000
= $20,000
Therefore, the free cash flow is $20,000.
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