Suppose you are the only owner of a chain of coffee shops near universities. your current cafes are doing well, but you are interested

Suppose you are the only owner of a chain of coffee shops near universities. your current cafes are doing well, but you are interested in starting a fine-dining restaurant you decide to use the cash generated from your existing business to enter into a new business. your accountant provides you with the following data on your current financial performance: financial update as of june 15 your existing business generates s 123,000 in ebit. the corporate tax rate applicable to your business is 35%. the depreciation expense reported in the financial statements is $23,429. you don’t need to spend any money for new equipment in your existing cafes; however, you do need $18,450 of additional cash. you also need to purchase $9,840 in additional supplier such is cloth table clothes and napkins, and more formal tableware – on credit. it is also estimated that your accruals, including taxes and wages payable, will increase by $6,150.

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Answer

Compute the amount of income tax. Income Tax = Income tax rate x Earnings before income taxes Income Tax = 35% x $123,000 Income Tax = $43,050 The corporate income tax rate is multiplied with the incomes before income taxes to catch out the quantity of income tax. Here, the income tax expenditure represents 35% (as given) of the incomes before income taxes which matches to $43,050. Such amount is castoff to take from the incomes before income tax to regulate the net income after tax. Compute the amount of free cash flow. Compute the Free Cash Flow EBIT (Earnings before Interest and Taxes) = 123000 Less: Income Tax (35% x 123000) = 43050 Net income after tax = 123000 – 43050 = 79950 Add: Depreciation Expense = 23429 Total = 79950 + 23429 = 103379 Working capital Changes: Increase in accruals = 6150 Working capital requirement = 18450 Less = 6150 – 18450 = (12300) Free cash flow = (-12300) + 103379 = 91079 Based on the evaluation, the amount of free cash flow is $91,079.

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