Hartzell Inc. had the following data for 2011, in millions: Net income = $600; after-tax operating income [EBIT(1 - T)] = $700; and Total assets = $2,000. Information for 2012 is as follows: Net income = $825; after-tax operating income [EBIT(1 - T)] = $925; and Total assets = $2,500. How much free cash flow did the firm generate during 2012?
A) $383
B) $425
C) $468
D) $514
E) $566

Question

Quizplus · Accepted Answer

Free cash flow is calculated as after-tax operating income minus the change in total assets. The change in total assets from 2011 to 2012 is $500 million ($2,500 - $2,000). Therefore, free cash flow for 2012 is $925 million (after-tax operating income) - $500 million (change in total assets) = $425 million.