Ref 11-2
Champagne, Inc., had revenues of $12 million, cash operating expenses of $8 million, and depreciation and amortization of $1.5 million during 2008. The firm purchased $700,000 of equipment during the year while increasing its inventory by $500,000 (with no corresponding increase in current liabilities). The marginal tax rate for Champagne is 30 percent.
-Free cash flow: What is Champagne's free cash flow for 2008?

Question

Quizplus · Accepted Answer

Free cash flow is calculated as: Net Income + Depreciation/Amortization - Capital Expenditures - Change in Working Capital. First, calculate the net income: Revenues ($12M) - Cash Operating Expenses ($8M) - Depreciation and Amortization ($1.5M) = Earnings Before Tax ($2.5M). Taxes = 30% of $2.5M = $0.75M. Net Income = $2.5M - $0.75M = $1.75M. Then, calculate the free cash flow: $1.75M (Net Income) + $1.5M (Depreciation/Amortization) - $0.7M (Capital Expenditures) - $0.5M (Increase in Inventory) = $2.05M.

Ref 11-2 Champagne, Inc., Had Revenues of $12 Million, Cash Operating Expenses