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Houston Pumps recently reported $232,500 of sales, $140,500 of operating costs other than depreciation, and $9,250...

Houston Pumps recently reported $232,500 of sales, $140,500 of operating costs other than depreciation, and $9,250 of depreciation. The company had $35,250 of outstanding bonds that carry a 6.75% interest rate, and its federal-plus-state income tax rate was 35%. In order to sustain its operations and thus generate future sales and cash flows, the firm was required to spend $15,250 to buy new fixed assets and to invest $6,850 in net operating working capital. What was the firm's free cash flow? a. 47,488 b. 45,031 c. 47,897 d. 44,622 e. 40,938

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Answer #1

Sales = $ 232500

Less: Operating Costs = $ 140500

EBITDA = $ 92000

Less: Depreciation = $ 9250

EBIT = $ 82750

Less: Interest Expense = Interest Rate x Outstanding Bonds = 0.0675 x 35250 = $ 2379.375

EBT = $ 80370.625

LessL Tax @ 35% = 0.35 x 80370.625 = $ 28129.71875

Net Income = $ 52240.90625

Add: Depreciation = $ 9250

Add: After-Tax Interest Expense = (1-0.35) x 2379.375 = $ 1546.594

Less: Investment Fixed Assets = $ 15250

Less: Net Operating Working Capital = $ 6850

Free Cash Flow to Firm (FCFF) = $ 40937.5 ~ $ 40938

Hence, the correct option is (e)

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