Question

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 $

Answer 1

(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]