During the year, the Senbet Discount Tire Company had gross sales of $1.14 million. The firm’s cost of goods sold and selling expenses were $533,000 and $223,000, respectively. The firm also had notes payable of $880,000. These notes carried an interest rate of 7 percent. Depreciation was $138,000. The firm’s tax rate was 35 percent. What was the firm’s operating cash flow?
Answered on
To calculate the Senbet Discount Tire Company's operating cash flow (OCF), we need to follow these steps:
1. Calculate the earnings before interest and taxes (EBIT):
EBIT = Gross sales - Cost of goods sold (COGS) - Selling expenses
2. Calculate the net operating profit after taxes (NOPAT):
NOPAT = EBIT x (1 - Tax rate)
3. Add back depreciation to NOPAT to get operating cash flow:
OCF = NOPAT + Depreciation
Let's do the calculations:
1. Calculate EBIT: EBIT = $1,140,000 (gross sales) - $533,000 (COGS) - $223,000 (selling expenses) EBIT = $1,140,000 - $533,000 - $223,000 EBIT = $384,000
2. Calculate NOPAT: Tax rate is given as 35%, which means we retain 65% (100% - 35%) of the earnings after paying taxes.
NOPAT = EBIT x (1 - Tax rate)
NOPAT = $384,000 x (1 - 0.35)
NOPAT = $384,000 x 0.65
NOPAT = $249,600
3. Adding back depreciation to get OCF:
OCF = NOPAT + Depreciation
OCF = $249,600 + $138,000
OCF = $387,600
Therefore, the firm's operating cash flow is $387,600.