Question

the management of rama company reported net income of $895,000. it had net cash provided by operating activities of $785,000, paid cash dividends of $65,000, and had capital expenditures of $220,000. what is the companys free cash flow? a $500,000. b $610,000. c $90,000. d $1,070,000.

Explanation:

Step1: Recall Free Cash Flow Formula

Free Cash Flow (FCF) is calculated as: \( \text{FCF} = \text{Net Cash from Operating Activities} - \text{Capital Expenditures} - \text{Cash Dividends Paid} \) (or sometimes, for a simpler version, \( \text{FCF} = \text{Net Cash from Operating Activities} - \text{Capital Expenditures} \) if dividends are considered part of discretionary spending, but in this case, the standard formula for FCF available to investors is \( \text{FCF} = \text{Operating Cash Flow} - \text{Capital Expenditures} - \text{Dividends} \), but let's check the values. Wait, actually, the common formula for free cash flow (to equity or to firm) can vary, but in the context of this problem, let's use the given values: Net Cash from Operating Activities = $785,000, Capital Expenditures = $220,000, Cash Dividends = $65,000. Wait, no, maybe the formula here is LXI3? Wait, no, let's re-express. Wait, actually, the correct formula for free cash flow (the amount of cash available after funding operations and capital expenditures, and paying dividends) is: LXI4. Wait, but let's plug in the numbers: $785,000 - $220,000 - $65,000. Wait, no, maybe the formula is \( \text{FCF} = \text{Net Cash from Operating Activities} - \text{Capital Expenditures} \), and then maybe dividends are not subtracted? Wait, no, let's check the answer options. Let's calculate $785,000 - $220,000 - $65,000 = $500,000? Wait, $785,000 - $220,000 = $565,000; $565,000 - $65,000 = $500,000. Which is option A. Wait, but let's confirm the formula. Free Cash Flow is typically calculated as Operating Cash Flow minus Capital Expenditures (and sometimes minus dividends, depending on the definition). In this problem, the net cash from operating activities is $785,000, capital expenditures are $220,000, and dividends paid are $65,000. So LXI6. So that's $500,000, which is option A.

Step2: Plug in the Values

Net Cash from Operating Activities = $785,000
Capital Expenditures = $220,000
Cash Dividends Paid = $65,000

Calculate \( 785000 - 220000 - 65000 \):
First, \( 785000 - 220000 = 565000 \)
Then, \( 565000 - 65000 = 500000 \)

Answer:

A. $500,000.