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Standard Deviation and Cash Flow

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Standard Deviation and Cash Flow
Chapter 12 Problems

1. Cash flow (LO2) Assume a corporation has earnings before depreciation and taxes of $100,000, depreciation of $50,000, and that it has a 30 percent tax bracket. Compute its cash flow using the format below.

Earnings before depreciation and taxes _____ Depreciation _____ Earnings before taxes _____ Taxes @ 30% _____ Earnings after taxes _____ Depreciation _____

12-1. Solution:

Earnings before depreciation and taxes $100,000 Depreciation – 50,000 Earnings before taxes 50,000 Taxes @ 30% 15,000 Earnings after taxes 35,000 Depreciation + 50,000 Cash flow $ 85,000

2. Cash flow (LO2) a. In problem 1, how much would cash flow be if there were only $10,000 in depreciation? All other factors are the same. b. How much cash flow is lost due to the reduced depreciation between Problems 1 and 2a?

3. Cash flow (LO2) Assume a firm has earnings before depreciation and taxes of $500,000 and no depreciation. It is in a 40 percent tax bracket. a. Compute its cash flow. b. Assume it has $500,000 in depreciation. Recompute its cash flow. c. How large a cash flow benefit did the depreciation provide?

12-3. Solution:

a. Earnings before depreciation and taxes $ 500,000 Depreciation – 0 Earnings before taxes 500,000 Taxes @ 40% – 200,000 Earnings after taxes 300,000 Depreciation – 0 Cash flow $300,000

b. Earnings before depreciation and taxes $500,000 Depreciation –500,000 Earnings before taxes 0 Taxes @ 40% 0 Earnings after taxes 0 Depreciation 500,000 Cash flow $500,000

c. $500,000- $300,000 =
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