Questions: 1. (10 percent) Wukong Inc. recently reported operating income (EBIT) of 3.75 million, depreciation of 1.40 million, and had a tax rate of 30%. The firm's expenditures on fixed assets and net operating working capital totaled 0.8 million. How much was its free cash flow, in millions?

Solution Steps

To calculate the free cash flow (FCF) for Wukong Inc., we need to follow these steps:

1. Calculate the Net Operating Profit After Taxes (NOPAT) using the formula: NOPAT = EBIT * (1 - Tax Rate).
2. Calculate the operating cash flow by adding depreciation to NOPAT.
3. Subtract the expenditures on fixed assets and net operating working capital from the operating cash flow to get the free cash flow.

To find the Net Operating Profit After Taxes (NOPAT), we use the formula: \[ \text{NOPAT} = \text{EBIT} \times (1 - \text{Tax Rate}) \] Substituting the given values: \[ \text{NOPAT} = 3.75 \times (1 - 0.3) = 3.75 \times 0.7 = 2.625 \]

Next, we calculate the operating cash flow by adding depreciation to NOPAT: \[ \text{Operating Cash Flow} = \text{NOPAT} + \text{Depreciation} \] Substituting the values: \[ \text{Operating Cash Flow} = 2.625 + 1.4 = 4.025 \]

Finally, we find the free cash flow by subtracting expenditures from the operating cash flow: \[ \text{Free Cash Flow} = \text{Operating Cash Flow} - \text{Expenditures} \] Substituting the values: \[ \text{Free Cash Flow} = 4.025 - 0.8 = 3.225 \]

Final Answer