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Question

ABC Ltd has its Earning before Interest and Tax as 45000. The tax rate applicable for the year is 25%. It has made a capital expenditure of Rs 22500 and a working capital expenditure of Rs 6800. Depreciation expenses for the year are 2380. What is Free cash flow to the firm?

A 6830 Correct Answer Incorrect Answer
B 13630 Correct Answer Incorrect Answer
C 36130 Correct Answer Incorrect Answer
D 18080 Correct Answer Incorrect Answer
E None of the above Correct Answer Incorrect Answer

Solution

Free Cash flow to the firm = Earning before int and tax (1-Tax rate) + non-cash expenses – fixed capital investment – working capital investment = 45000 *0.75 + 2380 – 22500 – 6800 = 6830 Depreciation is added because it was subtracted while calculating EBIT. As EBIT is before payment of interest and tax, we need not subtract interest payment (if given) nut we have to adjust for taxes. All types of capital expenditure (fixed capital and working capital) both are to be deducted.

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