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Q13-12B

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Essentials Of Investments
Found in: Page 437
Essentials Of Investments

Essentials Of Investments

Book edition 9th
Author(s) Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus
Pages 748 pages
ISBN 9780078034695

Short Answer

Eagle Products’ EBIT is $300, its tax rate is 35%, depreciation is $20, capital expenditures are $60, and the planned increase in net working capital is $30. What is the free cash flow to the firm?

Answer

$125

See the step by step solution

Step by Step Solution

Step 1: Given information

EBIT = $300

tc =35%

Depreciation = $20

Capital expenditure = $60

Increase in NWC = $30

Step 2: Calculation of Free cash flow of the firm

Formula for FCFF = EBIT( 1 - tc ) + Depreciation – Capital expenditure – Increase in NWC

= $300 x (1 – 0.35) + $20 - $60 - $30

= $125

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