Question

A firm has earnings before interest and taxes of $27,130, net income of $16,220, and taxes of $5,450 for the year. While the firm paid out $31,600 to pay off existing debt it then later borrowed $42,000. What is the amount of the cash flow to creditors?

a. $0
b. $14,040
c. -$14,040
d. $4,660
e. -$4,940

Answer 1

Answer:

The correct answer is e. -$4,940.

Explanation:

This problem requires us to calculate the amount of the cash flow to creditors. The cash flow to creditor means all payment made to creditors in form of interest payment or principal payment. The amount borrowed is deducted from it. The detail calculation is given below.

Interest =  Earning before interest and taxes - Net income - Taxes

Interest = 27,130 - 16,220 - 5,450

Interest = $ 5,460

Cash flow to creditors = 31,600 + 5,460 - 42,000 = -$ 4,940