1  If Cleveland Motors Had an EBIT of $22,790,500, Interest of $7,474,900 and is taxed at an average rate of 32% what is their Net Income? Round to the nearest cent

1 

Solution :

Net Income is calculated as follows

Net Income = ( Earnings before Interest and Taxes – Interest Expense ) * ( 1 – Average Tax rate )

As per the information given in the question we have

EBIT = Earnings before Interest and Taxes = $ 22,790,500 ; Interest Expense = $ 7,474,900 ;   Average Tax rate = 32 %   ;

Applying the above information in the formula we have Net Income as

= ( $ 22,790,500 - $ 7,474,900 ) * ( 1 – 0.32 )

= ( $ 22,790,500 - $ 7,474,900 ) * 0.68

= $ 15,315,600 * 0.68

= $ 10,414,608 ( Rounded off to the nearest cent )

Thus the Net Income of Cleveland Motors is = $ 10,414,608

2 

Cash flow from financing activities shows the changes in cash flows of an organization due to financing activities performed by it

We are going to discuss only that portion which covers the financing activities of the organization

Purchased treasury stock -

Purchased treasury stock causes a decrease in stockholder’s equity. Stockholder’s equity is a part of financing activities of an organization. So, Purchased treasury stock will result in decrease in cash from financing activities by $17

Increase in Long-term debt -

Increase in Long-term debt means that the organization has issued more debt instruments for generating finance. Debt is a part of financing activities of an organization and so Increase in Long-term debt will result in an Increase in cash flow from Financing Activities by $100

So, the net result will be as follows

Decrease in cash from financing activities due to Purchased treasury stock by $17

Increase in cash from financing activities due to Increase in Long-term debt by $100

So, Net result

= $100 - $17

= $83 Increase in cash flows from Financing Activities