Question

A potential target (JNGW, Inc.) has sales of $460,000, depreciation of $27,000, and net working capital of $56,000. The firm has a tax rate of 21 percent and a profit margin of 6 percent. The firm has no interest expense. What is the amount of the operating cash flow for JNGW, Inc.?

Answer 1

The operating cash flow for JNGW, Inc. is calculated by adding the depreciation to the net profit before tax and then subtracting the taxes. The result is an operating cash flow of $70,134.

Step-by-step explanation:

To calculate the operating cash flow (OCF) for JNGW, Inc., we follow the standard formula: OCF = Earnings Before Interest and Taxes (EBIT) + Depreciation - Taxes. Since the firm has no interest expense, EBIT can be calculated as net profit before tax. The net profit (profit margin applied to sales revenue) for JNGW, Inc. can be found by multiplying the sales by the profit margin: $460,000 * 6% = $27,600.

To find EBIT, we add back depreciation to the net profit because it was a non-cash expense. So, EBIT = $27,600 + $27,000 = $54,600. Finally, to find the taxes owed, we multiply EBIT by the tax rate: $54,600 * 21% = $11,466.

The OCF is then EBIT + Depreciation - Taxes, which is $54,600 + $27,000 - $11,466 = $70,134. Therefore, the operating cash flow for JNGW, Inc. is $70,134.