Question

Assume a corporation has earnings before amortization and taxes (EBAT) of $100,000 and amortization of $10,000, and it has a 34 percent tax rate.

a. Compute its cash flow. Cash flow $

b. Compute the difference in cash flow, If there was $50,000 in amortization. Difference in cash flow $

Answer 1

Answer a)

Cash Flow = (EBAT - Amortization - Taxes) + Amortization

= (100,000 - 10,000 - 34% * (100,000 - 10,000)) + 10,000

= (90000 - 30,600) + 10000

= 69,400

Answer b)

Cash Flow = (EBAT - Amortization - Taxes) + Amortization

= (100,000 - 50,000 - 34% * (100,000 - 50,000)) + 50,000

= (50000- 17000) + 50000

= 83000

Difference in Cash flow = 83,000 - 69,400 = $ 13,600

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