Question

A firm has sales of $10,000, EBIT of $3,000, depreciation of $400, and fixed assets increased by $2,000. If the firm's tax rate is 30 percent and there were no increases in net operating working capital, what is the firm's free cash flow? Multiple Choice a. $500 b. $600 c. $7400 d. $1,220

Answer 1

Answer:

The correct option is A,free cash flow is $500 as shown by my calculation below.

Explanation:

The formula for free cash flows to firm is given as:

FCFF=EBIT(1-t)+D&A-change in net working capital-capex

EBIT is earnings before interest and tax

D is depreciation

A is amortization

Capex is capital expenditure

FCFF=3000(1-0.30)+400-2000

FCFF=$500