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INSTRUCTOR'S COMMENT: This question requires you to calculate a simple net income and free cash flow.
INSTRUCTOR'S COMMENT: This question requires you to calculate a simple net income and free cash flow. When calculating income taxes, assume that the depreciation expense is the same for both "book" and "tax" purposes. (In reality, they usually differ.) Also, assume that the "book" income tax equals the cash income tax (those, too, usually differ in the real world.) Watson Oil recently reported (in millions) $8,250 of sales, $5,750 of operating costs other than depreciation, and $650 of depreciation. The company had $3,200 of outstanding bonds that carry a 5% 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 make $1,250 of capital expenditures on new fixed assets and to invest $300 in net operating working capital. By how much did the firm's net income exceed its free cash flow? a. $718 b. $796 c. $836 d. $878 e. $756
