Last year Rattner had $5 million in operating income(EBIT). The company had net depreciation expense of $1 million and interest expense of $1 million; its corporate tax rate was 40 percent. The company had $14 million in current assets and $4 million in non-interest bearing liabilites, it has 15 million in net plant and equipment. It estimates that it has an after-tax cost of capital of 10 percent. Assume that Rattners only noncash item was depreciation.
A) What was the company's net income for the year?
B) What was the companys net cash flow?
C) What was the company's net operating profit after taxes (NOPAT)?
D0 What was the companys operating cash flow?
Please help me with this I need some help to understand this word problem.
Thank You
A) To calculate the net income for the year, we need to consider the following steps:
Step 1: Start with the operating income (EBIT)
Operating Income (EBIT) = $5 million
Step 2: Deduct the depreciation expense (noncash item)
Depreciation Expense = $1 million
Step 3: Deduct the interest expense
Interest Expense = $1 million
Step 4: Multiply the result by (1 - tax rate) to determine the after-tax income
Tax Rate = 40%
After-Tax Income = (Operating Income - Depreciation Expense - Interest Expense) * (1 - Tax Rate)
After-Tax Income = ($5 million - $1 million - $1 million) * (1 - 0.4)
Calculate the value.
After-Tax Income = $3 million * 0.6
After-Tax Income = $1.8 million
Therefore, the company's net income for the year is $1.8 million.
B) To determine the company's net cash flow, we need to consider the following steps:
Step 1: Start with the net income
Net Income = $1.8 million
Step 2: Add back the depreciation expense (noncash item)
Depreciation Expense = $1 million
Step 3: Calculate the net cash flow by subtracting the change in working capital
Change in Working Capital = Current Assets - Non-Interest Bearing Liabilities
Change in Working Capital = $14 million - $4 million
Calculate the value.
Change in Working Capital = $10 million
Net Cash Flow = Net Income + Depreciation Expense - Change in Working Capital
Net Cash Flow = $1.8 million + $1 million - $10 million
Therefore, the company's net cash flow for the year is -$7.2 million.
C) The company's net operating profit after taxes (NOPAT) can be calculated as follows:
Net Operating Profit After Taxes (NOPAT) = Operating Income (EBIT) * (1 - Tax Rate)
NOPAT = $5 million * (1 - 0.4)
Calculate the value.
NOPAT = $5 million * 0.6
NOPAT = $3 million
Therefore, the company's net operating profit after taxes (NOPAT) is $3 million.
D) The company's operating cash flow can be calculated as follows:
Operating Cash Flow = Net Operating Profit After Taxes (NOPAT) + Depreciation Expense
Operating Cash Flow = $3 million + $1 million
Therefore, the company's operating cash flow is $4 million.
Sure, I can help you with this word problem. Let's break it down step-by-step to find the answers:
A) To calculate the company's net income, we start with the operating income (EBIT) of $5 million. Then, we subtract the depreciation expense and interest expense.
Net Income = EBIT - Depreciation Expense - Interest Expense
Given that the net depreciation expense is $1 million and the interest expense is $1 million, we have:
Net Income = $5 million - $1 million - $1 million = $3 million
Therefore, the company's net income for the year is $3 million.
B) To calculate the company's net cash flow, we need to consider the changes in working capital. Working capital is the difference between current assets and current liabilities.
Net Cash Flow = Net Income + Depreciation Expense +/- Changes in Working Capital
Given that the current assets are $14 million and non-interest bearing liabilities are $4 million, we have:
Working Capital = Current Assets - Non-Interest Bearing Liabilities
Working Capital = $14 million - $4 million = $10 million
Since the problem does not provide any information about changes in working capital, we assume it to be constant.
Therefore, the net cash flow is:
Net Cash Flow = $3 million (Net Income) + $1 million (Depreciation Expense) = $4 million
The company's net cash flow for the year is $4 million.
C) The net operating profit after taxes (NOPAT) is the operating income (EBIT) minus the taxes.
NOPAT = EBIT - Taxes
Given that the corporate tax rate is 40%, we can calculate the taxes as:
Taxes = Tax Rate * EBIT
Taxes = 0.4 * $5 million = $2 million
Therefore, the net operating profit after taxes is:
NOPAT = $5 million (EBIT) - $2 million (Taxes) = $3 million
The company's net operating profit after taxes is $3 million.
D) To calculate the company's operating cash flow, we start with the net income and then add back the non-cash expenses such as depreciation.
Operating Cash Flow = Net Income + Depreciation Expense
Given that the net income is $3 million and the depreciation expense is $1 million, we have:
Operating Cash Flow = $3 million (Net Income) + $1 million (Depreciation Expense) = $4 million
Therefore, the company's operating cash flow is $4 million.
I hope this helps! Let me know if you have any further questions.