Question

A firm's net income is $10M. Its depreciation is $15M, interest expense is $5M, and the tax rate is 20%. Find the operating cash flow. "

A.$6M
B.$26M
C.$10M
D.$25M
E.$29M

Answer 1

The operating cash flow of the firm is calculated by adding back non-cash expenses and after-tax interest expenses to the net income. The correct operating cash flow in this case is $29M.

Step-by-step explanation:

To find the operating cash flow of a firm, we start with the net income and adjust for non-cash expenses and changes in working capital. To calculate the operating cash flow, we add back depreciation because it is a non-cash expense and we add back the interest expense after adjusting it for taxes, since operating cash flow represents the cash generated from the firm's operations before the payment of interest and taxes.

Here is the calculation:

• Net Income = $10M
• Depreciation = $15M
• Interest Expense (after tax) = $5M * (1 - 0.20)

Operating Cash Flow (OCF) = Net Income + Depreciation + (Interest Expense * (1 - Tax Rate))

OCF = $10M + $15M + ($5M * (1 - 0.20))

OCF = $10M + $15M + $4M

OCF = $29M