Question

An analyst has collected the following information regarding Gilligan Grocers:

Earnings before interest and taxes (EBIT) = $700 million.
Earnings before interest, taxes, depreciation and amortization (EBITDA) = $850 million.
Interest expense = $200 million.
The corporate tax rate is 40 percent.
Depreciation is the company’s only non-cash expense or revenue.
What is the company’s net cash flow?

a. $850 million

b. $650 million

c. $570 million

d. $450 million

e. $500 million

Answer 1

The correct answer is D.

Step-by-step explanation:

Giving the following information:

Earnings before interest and taxes (EBIT) = $700 million.

Earnings before interest, taxes, depreciation and amortization (EBITDA) = $850 million.

Interest expense = $200 million.

The corporate tax rate is 40 percent.

First, we need to determine the depreciation expense.

Depreciation= EBITDA - EBIT= 850 - 700= 150million

Net cash flow= EBIT - Interest - Tax + Depreciation

EBIT= 700

Insterest= 200 million (-)

EBT= 500

Tax= 500*0.40= 200 (-)

Depreciation= 150 (+)

Net cash flow= 450 million