Tater and Pepper Corp. reported free cash flows for 2013 of $20 million and investment in operating capital of $15 million. Tater and Pepper listed $8 million in depreciation expense and $12 million in taxes on its 2010 income statement. Calculate Tater and Pepper's 2013 EBIT.

Question

Quizplus · Accepted Answer

The formula for free cash flow is:
FCF = EBIT(1-tax rate) + Depreciation - Capital Expenditures - ∆Operating Capital
We know FCF = $20 million and ∆Operating Capital = -$15 million. We also know Depreciation = $8 million and Taxes = $12 million. Thus:
$20 million = EBIT(1- Tax rate) + $8 million - $15 million - $0
$20 million = EBIT(1-Tax rate) - $7 million
$27 million = EBIT(1-Tax rate)
We can use the information on taxes to solve for EBIT:
$12 million = EBIT(Tax rate)
Tax rate = 0.3
Thus:
$27 million = EBIT(1-0.3)
EBIT = $39 million