Suppose you are the only owner of a chain of coffee shops near universities. Your current cafés are doing well, but you are interested in starting a fine-dining restaurant. You decide to use the cash generated from your existing business to enter into a new business. Your accountant provides you with the following data on your current financial performance: Financial update as of June 15 • Your existing business generates $87,000 in EBIT. • The corporate tax rate applicable to your business is 25%. • The depreciation expense reported in the financial statements is $16,571. • You don’t need to spend any money for new equipment in your existing cafés; however, you do need $13,050 of additional cash. • You also need to purchase $6,960 in additional supplies—such as tableclothes and napkins, and more formal tableware—on credit. • It is also estimated that your accruals, including taxes and wages payable, will increase by $4,350. Based on your evaluation you have in free cash flow. Can a company have negative free cash flow? No Yes
Suppose you are the only owner of a chain of coffee shops near universities. Your current cafés are doing well, but you are interested in starting a fine-dining restaurant. You decide to use the cash generated from your existing business to enter into a new business. Your accountant provides you with the following data on your current financial performance: Financial update as of June 15 • Your existing business generates $87,000 in EBIT. • The corporate tax rate applicable to your business is 25%. • The depreciation expense reported in the financial statements is $16,571. • You don’t need to spend any money for new equipment in your existing cafés; however, you do need $13,050 of additional cash. • You also need to purchase $6,960 in additional supplies—such as tableclothes and napkins, and more formal tableware—on credit. • It is also estimated that your accruals, including taxes and wages payable, will increase by $4,350. Based on your evaluation you have in free cash flow. Can a company have negative free cash flow? No Yes
Chapter15: Taxing Business Income
Section: Chapter Questions
Problem 3DQ
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Question
Suppose you are the only owner of a chain of coffee shops near universities. Your current cafés are doing well, but you are interested in starting a fine-dining restaurant. You decide to use the cash generated from your existing business to enter into a new business. Your accountant provides you with the following data on your current financial performance:
Financial update as of June 15
| • | Your existing business generates $87,000 in EBIT. |
| • | The corporate tax rate applicable to your business is 25%. |
| • | The |
| • | You don’t need to spend any money for new equipment in your existing cafés; however, you do need $13,050 of additional cash. |
| • | You also need to purchase $6,960 in additional supplies—such as tableclothes and napkins, and more formal tableware—on credit. |
| • | It is also estimated that your accruals, including taxes and wages payable, will increase by $4,350. |
Based on your evaluation you have in free cash flow .
Can a company have negative free cash flow?
No
Yes
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