ACCOUNTIONG

Question

A company has earnings before income tax of $2 million and a 15% tax rate. It had $250,000 in depreciation expenses with a $50,000 increase in working capital. It had another $100,00 in capital expenditures. What is its free cash flow.

Answer 1

The Free Cash Flow= 2,000,000X (100%-15%) = 1,700,000 Net income + 250,000 Depreciation- 50,000 increase in working capital - 100,000 capital expenditures= $1,800,000 Free cash flow.

As a rule increase in working capital represents "Uses" of funds and the same apply for increase in capital expenditures.