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In: Finance

Assume a firm has EBAT of $540,000, and no amortization. It is in a 30 percent...

Assume a firm has EBAT of $540,000, and no amortization. It is in a 30 percent tax bracket. a. Compute its cash flow. Cash flow $ b. Assume it has $540,000 in amortization. Recompute its cash flow. Cash flow $ c. How large a cash flow benefit did the amortization provide? Benefit in cash flow $

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Expert Solution

(a)-Free Cash Flow
Particulars   Amount ($)
Earnings Before Amortization & Taxation                          5,40,000
Less: Depreciation & Amortization                                   -  
Earnings Before Taxation                          5,40,000
Less: Tax at 30%                          1,62,000
Earnings After Tax                          3,78,000
Add Back: Depreciation & Amortization                                   -  
Free Cash Flow                          3,78,000
(b)-Free Cash Flow if the firm has $540,000 in amortization.
Particulars   Amount ($)
Earnings Before Amortization & Taxation                          5,40,000
Less: Depreciation & Amortization                          5,40,000
Earnings Before Taxation                                   -  
Less: Tax at 30%                                   -  
Earnings After Tax                                   -  
Add Back: Depreciation & Amortization                          5,40,000
Free Cash Flow                          5,40,000
(c)-Benefit in cash flow
The Benefit in Net Cash Flow will be $162,000 [$540,000 - $378,000]

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