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Kibo group is a manufacturing company, last year the company reported an operating income or earnings before interest and tax of 500,000. The company had depreciation expense of 100,000 and an interest expense of 100,000 and the corporate tax rate was 40%.
The company has 1,400,000 in non interest earning current assets and 400,000 in non interest bearing liabilities. It also has 1,500,000 in net plant and equipment. It estimates that it has after tax cost of capital of 10%. Assume that the company’s only non cash item was depreciation.
Question:
If the capital in the previous year was 2,400,000 what was the company’s free cash flow for the year?I HUMBLY SEEK YOUR HELP
Please do not simply set me test questions and expect an answer. You must have an answer in the same book in which you found the question (assuming that you are using a Revision Kit from one of theACCA approved publishers, which you must be using). You should therefore ask about whatever it is in the answer that you are not clear about and then I will explain.
Assuming that the question wants free cash flow to the firm (and not free cash flow to equity), then it is exactly as you did when getting cash flows in Paper FM (was Paper F9). You take the profit before interest and tax, add back the depreciation (because it is not a cash flow), and subtract the tax at 40% of the profit before interest and tax because that is a cash flow.
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