Beckham Broadcasting Company (BBC) has operating income (EBIT) of $2,500,000. The company's depreciation expense is $500,000 and it has no amortization expense. The company is 100% equity financed. The company has a 40% tax rate, and its net investment in operating capital is $1,000,000. What is BBC's free cash flow?

BBC's free cash flow is $1,000,000.

Explanation:

Free cash flow is the cash a company generates from its business activities after deducting the cash flows from operations and capital assets. The free cash flow is given by the formula below:

= EBIT × (1 -Tax Rate) + Depreciation & Amortization  - Net investment

The parameters are available in the question, what needs to be done is to input those numbers as follows:

Free cash flow = $2,500,000 x (1 - 40%) + $500,000 - $1,000,000

Applying the basic BODMAS rule, you have

Free cash flow  = $1,500,000 + $500,000 - $1,000,000

Therefore, BBC's free cash flow is $1,000,000.