Shrives Publishing recently reported $13,000 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?

$3762.50

Explanation:

Given the following :

Sales = $13,000

Operating Cost other than Depreciation = $5,500

Depreciation = $1250

Bond value = $3,500

Interest rate = 6.25%

Tax rate = 35%) = 0.35

Expenditure on fixed assets and net operating working capital = $1,550

What was its free cash flow?

Free cash FLOW (FCF) = EBIT(1 - tax rate) + depreciation - ( Expenditure on fixed assets and net operating working capital)

EBIT = Earning before income tax;

EBIT = SALES - Operating Cost other than DEPRECIATION - DEPRECIATION

EBIT = $13000 - $5500 - $1250 = $6250

FCF = $6250(1 - 0.35) + $1250 - $1550

FCF = $6250(0.65) + $1250 - $1550

FCF = $4062.50 + $1250 - $1550

FCF = $3762.50

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