In: Finance
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 $
(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] | |