Free Cash Flow Catering Corp.reported free cash flows for 2013 of $8 million and investment in operating capital of $2 million.Catering listed $1 million in depreciation expense and $2 million in taxes on its 2008 income statement.What was Catering's 2013 EBIT?

Question

Quizplus · Accepted Answer

To find EBIT, we need to use the formula:
EBIT = Net Income + Interest Expense + Taxes 
We know that Catering listed $2 million in taxes on its 2008 income statement, so we can assume that this will be a similar amount of taxes listed for 2013.
So, we can say:
EBIT - $1 million (depreciation) - $2 million (taxes) = Net Income
We also know that:
Free Cash Flow = Net Income + Depreciation - Investment in Operating Capital 
Plugging in the numbers given:
$8 million = Net Income + $1 million - $2 million
Net Income = $9 million
Now we can solve for EBIT:
EBIT - $1 million - $2 million = $9 million
EBIT = $12 million 
Therefore, the best choice is C) $11 million.