XYZ has excess cash of $400,000 and earns 2.5% on excess cash.If XYZ has a corporate tax rate of 30%,what is the free cash flow to the firm?

Question

Quizplus · Accepted Answer

First, we need to calculate the interest earned on excess cash:

Interest earned = $400,000 x 2.5% = $10,000

Since XYZ has a corporate tax rate of 30%, we need to calculate the tax expense on the interest income:

Tax expense = $10,000 x 30% = $3,000

Finally, we can calculate the free cash flow to the firm:

Free cash flow to the firm = Net income + Non-cash expenses - Changes in working capital - Capital expenditures - Dividends

Since we only have information on excess cash and interest income, we cannot calculate net income, non-cash expenses, changes in working capital, or capital expenditures. We also do not have any information on dividends.

Therefore, the only relevant information for calculating free cash flow to the firm is the after-tax interest income:

Free cash flow to the firm = $10,000 - $3,000 = $7,000

Therefore, the answer is C, $1.073 million.

XYZ Has Excess Cash of $400,000 and Earns 2