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?
A) $7400
B) $600
C) $500
D) -$1,220

Question

Quizplus · Accepted Answer

Free Cash Flow (FCF) is calculated as Net Operating Profit After Taxes (NOPAT) plus Depreciation minus Capital Expenditures. NOPAT is EBIT minus taxes. Taxes are 30% of $3,000 (EBIT), which equals $900. So, NOPAT is $3,000 - $900 = $2,100. Adding back Depreciation ($400) gives $2,500. Subtracting the increase in fixed assets ($2,000) as capital expenditure gives an FCF of $500.

A Firm Has Sales of $10,000, EBIT of $3,000, Depreciation