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The KBC Corporation had operating income (EBIT) of RM750,000 and depreciation expenses of RM200,000
The KBC Corporation had operating income (EBIT) of RM750,000 and depreciation expenses of RM200,000. It is 100% equity financed (no debt), & its corporate tax rate is 40%. The firm had no amortization expense. What are net income, net cash flow, & operating cash flow? 11. What is free cash flow? If you were an investor, why might you be more interested in free cash flow than net income?
Expert Solution
Calculation of Net income, Net cash flow and operating cash flow:
| Particular | Amount in RM |
| EBIT | 750,000 |
| Less: Tax (750,000*40%) | 300,000 |
| Earning after Tax or Net Income | 450,000 |
| Add: Depreciation | 200,000 |
| Net Cash flow | 650,000 |
| Add: Tax | 300,000 |
| Operating Cash flow | 950,000 |
Answer No. 2
Free cash flow is the cash balance which is avaiable in the hand of a company after payoff its operating expenses and capital expenses. Free cash flow is used to evaluate the effeciency of company in generating cash.
Formula for Free cash flow = Operating cash flow - Capital expenses
The Investors use free cash flow to measure whether a company might have enough cash, after funding operations and capital expenditures, to pay investors through dividends and share buybacks. The free cash flow provie the cash generation capacity of a organisation but the net income consider the non cash expenses and income like depreciation, bad debt etc. by which the cash generation capaity of an organosation is not affected, so the Investor is more interested in free cash flow than the net income.
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