Purchase Solution

Changes In Free Cash Flow

Not what you're looking for?

Ask Custom Question

Grommit Engineering expects to have net income next year of $20.75 million and free cash flow of $22.155 million. Grommit's marginal corporate tax rate is 35%.
a. If Grommit increases leverage so that its interest expense rises by $1 million, how will its net income change?
b. For the same increase in interest expense, how will free cash flow change?

Purchase this Solution
Solution Summary

Grommit Engineering expects to have net income next year of $20.75 million and free cash flow of $22.155 million. Grommit's marginal corporate tax rate is 35%.
a. If Grommit increases leverage so that its interest expense rises by $1 million, how will its net income change?
b. For the same increase in interest expense, how will free cash flow change?

Solution Preview

a. Net income equals operating income less taxes. Because interest expense is tax-deductible, the company will reduce its taxes by the amount of interest ...

Purchase this Solution
Free BrainMass Quizzes
Accounting: Statement of Cash flows

This quiz tests your knowledge of the components of the statements of cash flows and the methods used to determine cash flows.

IPOs

This Quiz is compiled of questions that pertain to IPOs (Initial Public Offerings)

Change and Resistance within Organizations

This quiz intended to help students understand change and resistance in organizations

Organizational Behavior (OB)

The organizational behavior (OB) quiz will help you better understand organizational behavior through the lens of managers including workforce diversity.

Balance Sheet

The Fundamental Classified Balance Sheet. What to know to make it easy.

View More Free Quizzes
Related BrainMass Solutions

  • Statement of Cash Flows for Creative Works Company

    Less: Changes in working capital (8,000) Less: Capital expenditures (95,000) Free cash flow (23,000) A cash flow statement is prepared.

  • Nova Electrics: What is the firm's projected free cash flow for the year 2005?

    Free Cash Flow = Cash Flow from Operations - Net Capital Spending - Changes in NWC After the $1.2 million are paid, what is left = 6-1.2 = $4.8 million So Current Assets would increase by $4.8 million (Cash), now the firm has a liability of ($0.4

  • Profitable Business with Negative Free Cash Flow

    Generally, I would say high Capex is the more typical reason for a profitable, growing business to have negative free cash flow. However, large changes in net working capital is still a possibility.

  • Free-Cash Flow

    Since we are interested in the cash flow effects, we consider only changes in non-cash working capital in this analysis.

  • This post addresses the Grommit Engineering exercise.

    b) For the same increase in interest expense, how will free cash flow change? Free cash flow is not affected by interest expenses.

  • Internal Rate of Return and Free Cash Flow

    154932 Internal Rate of Return and Free Cash Flow 1) Determine to the nearest percent the IRR on the following projects: A) An initial outlay of $ 10,000 resulting in a free cash flow of $ 2000 at the end of year 1, $ 5000 at the end of year 2, and

  • Net Income, Cash Flow, and EVA

    Free cash flow = NOPAT - changes in working capital - capital expenses =3-1 =$2 mn *changes in working capital would be operating capital this year less the operating capital in the previous year. 6.

  • Free Cash Flow, Income Measurements, Positive theory

    540717 Free Cash Flow, Income Measurements, positive theory in accounting, and Comprehensive Income 1.

  • Capital Decision for Cash Flows or Accounting Profits

    Should the company be interested in incremental cash flow, incremental profit, total free cash flow, or total profit. Should a company focus on cash flows or accounting profits in making a capital decision?

  • Free cash flow

    capital = -7,000 - change in capital spending = 0 Free cash flow = 900,000-306,000+300,000-7,000=$887,000 The solution explains how to calculate the free cash flow

View More Related Solutions