Houston pumps recently reported $185,250 of sales, $140,500 of operating costs other than depreciation, and $9,250 of depreciation. the company had $35,250 of outstanding bonds that carry a 6.75% interest rate, and its federal-plus-state income tax rate was 35%. in order to sustain its operations and thus generate future sales and cash flows, the firm was required to spend $15,250 to buy new fixed assets and to invest $6,850 in net operating working capital. what was the firm's free cash flow? a. $10,225 b. $10,736 c. $11,273 d. $11,837 e. $12,429

The answer is a. $10,225

Explanation:

The solution involves two steps. The first step is the calculation of net operating profit after tax (NOPAT) while the second step is the calculation of free cash flow.

Step 1 - Calculation of NOPAT

Sales                                            $185,250

Operating costs                          ($140,500)

Depreciation                                ($9,250)

Operating profit                           $35,500

Tax (35%)                                      ($12,425)

NOPAT                                          $23,075

Step 2 - Calculation of free cash flow

NOPAT                                          $23,075

Depreciation                                 $9,250

Changes in working capital         ($6,850)

Capital expenditure                      ($15,250)

Free cash flow                               $10,225

b is the correct answer