bartling energy systems recently reported $9,250 of sales, $5,750 of operating costs other than depreciation, and $825 of depreciation. the company had no amortization charges, it had $3,200 of outstanding bonds that carry a 5% interest rate, and its federal-plus-state income tax rate was 25%. in order to sustain its operations and thus generate sales and cash flows in the future, the firm was required to make $1,250 of capital expenditures on new fixed assets and to invest $300 in net operating working capital. by how much did the firm's net income exceed its free cash flow?

Question

16-12-2022
Business

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bartling energy systems recently reported $9,250 of sales, $5,750 of operating costs other than depreciation, and $825 of depreciation. the company had no amortization charges, it had $3,200 of outstanding bonds that carry a 5% interest rate, and its federal-plus-state income tax rate was 25%. in order to sustain its operations and thus generate sales and cash flows in the future, the firm was required to make $1,250 of capital expenditures on new fixed assets and to invest $300 in net operating working capital. by how much did the firm's net income exceed its free cash flow?

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edwardgk12 edwardgk12 · Answer 1 · 2022-12-20T12:25:10-05:00

Bartling energy systems's net income will exceed $605 its free cash flow.

First, we need to calculate the net income of bartling company.
Net income = (sales - operating cost other than depreciation - depreciation - (debt * interest rate)) * (1 - tax rate)

= 9,250 - 5,750 - 825 - (3,200 * 5%) * (1 - 0.25)

= $1,886.25

Now, how to calculate free cash flow?

Free cash flow (FCF) is the money a company has left over after paying its operating expenses and capital expenditures. The more free cash flow that a company has, the more it can allocate to dividends, paying down debt, and growth opportunities.

Free cash flows formula is

= (sales - operating cost other than depreciation - depreciation) * (1 - tax rate) + depreciation - capital expenditure - net operating working capital

= (9,250 - 5,750 - 825) * (1 - 0.25) + 825 - 1,250 - 300

= $1,281.25

So, the excess amount will be :
= net income - free cash flow

= $1,886.25 - $1,281.25

= $605

So, the net income of bartling energy is exceed by $605 of its free cash flow.

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