Soluciones cap 12 - Assume a corporation has earnings...

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Unformatted text preview: Assume a corporation has earnings before depreciation and taxes of $90,000, depreciation of $40,000, and that it is in 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 _____ Cash flow _____ 12-1. Solution: Earnings before depreciation and taxes $90,000 Depreciation –40,000 Earnings before taxes 50,000 Taxes @ 30% –15,000 Earnings after taxes $35,000 Depreciation +40,000 Cash flow $75,000 2. 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? 12-2. Solution: a. Earnings before depreciation and taxes $90,000 Depreciation –10,000 Earnings before taxes $80,000 Taxes @ 30% –24,000 Earnings after taxes $56,000 Depreciation +10,000 Cash flow $66,000 b. Cash flow (problem 1) $75,000 Cash flow (problem 2a) 66,000 Difference in cash flow $ 9,000 . Bob Cole, the president of a New York Stock Exchange-listed firm, is very short term oriented and interested in the immediate consequences of his decisions. Assume a project that will provide an increase of $3 million in cash flow because of favorable tax consequences, but carries a three-cent decline in earning per share because of a write-off against first quarter earnings. What decision might Mr. Cole make? 12-4. Solution: Bob Cole Being short term oriented, he may make the mistake of turning down the project even though it will increase cash flow because of his fear of investors’ negative reaction to the more widely reported quarterly decline in earnings per share. Even though this decline will be temporary, investors might interpret it as a negative signal. 6. Assume a $40,000 investment and the following cash flows for two alternatives. Year Investment X Investment Y 1 $ 6,000 $15,000 2 8,000 20,000 3 9,000 10,000 4 17,000 — 5 20,000 — Which of the alternatives would you select under the payback method?...
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This note was uploaded on 10/30/2011 for the course FINANCE 602 taught by Professor Soto during the Fall '11 term at Pontifical Catholic University of Peru.

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Soluciones cap 12 - Assume a corporation has earnings...

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