Hello tutor,
I came across with this question in F3 Opentuition notes. I found that the answer to the Free cash flow to Kappa in calculating the Tax confusing.
When calculating the tax here, should we deduct the operating profit by the interest payment first, and then times the tax rate ? i.e. (935 -170) x 20%?
Thank you.
Kenneth
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Kappa has recently published its financial statements and extracts reveal the following information:
$000s
Investment in working capital 185
Investment in non-current assets 420
Depreciation 120
Operating profit 935
Interest 170
Dividends 150
Kappa’s company profits are currently taxed at 20%
Calculate the free cash flow and free cash flow to equity of Kappa.
Answer 6 – Free cash flows
$000s
Profit before interest and tax (operating profit) 935
Less: Tax (20% x 935) (187)
Add: Depreciation (non-cash) 120
Less: Investment in non-current assets (420)
Less: Investment in working capital (185)
FREE CASH FLOW 263
Less: Interest (170)
FREE CASH FLOW TO EQUITY 93