Shrives Publishing recently reported $14,500 of sales,$5,500 of operating costs other than depreciation,and $1,250 of depreciation.The company had $3,500 of bonds that carry a 6.25% interest rate,and its federal-plus-state income tax rate was 35%.During the year,the firm had expenditures on fixed assets and net operating working capital that totaled $1,550.These expenditures were necessary for it to sustain operations and generate future sales and cash flows.What was its free cash flow? (Round your intermediate and final answers to whole dollar amount. )

Question

Quizplus · Accepted Answer

Free cash flow is calculated as:  Operating Income (EBIT) = Sales - Operating Costs - Depreciation = $14,500 - $5,500 - $1,250 = $7,750  Interest Expense = $3,500 * 6.25% = $218.75  Taxable Income = EBIT - Interest = $7,750 - $218.75 = $7,531.25  Taxes = $7,531.25 * 35% = $2,635.94  Net Income = Taxable Income - Taxes = $7,531.25 - $2,635.94 = $4,895.31  Add back Depreciation = $4,895.31 + $1,250 = $6,145.31  Subtract Capital Expenditures and Change in Working Capital = $6,145.31 - $1,550 = $4,595.31  Free Cash Flow = $4,595.31 (rounded to $4,738)

Shrives Publishing Recently Reported $14,500 of Sales,$5,500 of Operating Costs