The company paid $155,000 in dividends and $220,000 in interest. The addition to retained earnings is $325,000.If sales are $1,600,000 and depreciation is $160,000, what is EBIT? What is OCF? (Use 35% tax rate).


I know EBIT= 1,440,000, but How do I find OCF(operating Cash flow)?

What I got is OCF= EBIT+ Deprecation-Taxes

1,440,000+160,000-220,000= 1,380,000

1,380,000*35%=483,000 is that right?

Either I need another cup of coffee, or the numbers here aren't hanging together.

From the given info, taxable income is Sales - Depr'n - Interest, which gives
1,600,000 - 160,000 - 220,000 = 1,220,000.

Then the tax bill on that amount, at 35%, is 427,000. Hence the net bottom line (after-tax income) is 1,220,000 - 427,000 = 793,000 = (1,220,000 * 0.65).

So far so good, but that should also agree with after-tax income as determined by a bottom-up approach: Addition to RE + dividends paid = 325,000 + 155,000 = 480,000.

Thus either there's some internal inconsistency with the furnished info, or I've just gone goofy. (With the day I'm having, the boys in Vegas would give that one even money.)

But regarding your formula for OCF, you're getting close but don't forget to deduct interest expense as well. It therefore is expressed by

OCF = EBIT - (I)nterest - (T)axes + Depreciation.