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?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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