CyberX Corp. has earnings before depreciation and taxes of $380,000, depreciation of $120,000, and is in a 22% tax bracket. Compute its cash flow.

Question

CyberX Corp. has earnings before depreciation and taxes of $380,000, depreciation of $120,000, and is in a 22% tax bracket.  Compute its cash flow.

BlackTom AI · Accepted Answer

We start with the given figures: earnings before depreciation and taxes (EBDT) = 380,000, and depreciation = 120,000. The tax rate is 22%.

First, compute earnings before tax (EBT) by subtracting depreciation from EBDT: EBT = 380,000 − 120,000 = 260,000.

Next, calculate taxes on EBT: Taxes = 0.22 × 260,000 = 57,200.

Then determine net income (after taxes): Net income = EBT − Taxes = 260,000 − 57,200 = 202,800.

Finally, compute cash flow by adding back non-cash depreciation to net income: Cash flow = Net income + Depreciation = 202,800 + 120,000 = 322,800.

Option analyses:
- 452,000: This number is too high because it would imply either not subtracting depreciation before tax or applying taxes incorrectly. It does not match the correct sequence of subtracting depreciation to get EBT, then applying taxes, then adding depreciation back. 
- 322,800: This matches the proper cash flow calculation via after-tax operating cash flow = (EBDT − depreciation) × (1 − tax rate) + depreciation, which simplifies to 322,800 in this case. 
- 312,000: This underestimates cash flow and suggests an error in tax or depreciation treatment; it does not align with EBT and tax computation. 
- 424,000: This figure is also inconsistent with the correct tax impact; it could come from misapplying taxes to EBDT or miscounting the depreciation adjustment.

Overall, the correct approach yields a cash flow of 322,800, consistent with standard treatment of depreciation as a non-cash expense that affects taxes but is added back to after-tax income to obtain cash flow.

33:390:400:R6 CORPORATE FINANCE Corporate Finance Final Exam

CyberX Corp. has earnings before depreciation and taxes of $380,000, depreciation of $120,000, and is in a 22% tax bracket. Compute its cash flow.

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