An analyst has collected the following information regarding gilligan grocers:

earnings before interest and taxes (ebit) = $700 million.
earnings before interest, taxes, depreciation and amortization (ebitda) = $850 million.
interest expense = $200 million.
the corporate tax rate is 40 percent.
depreciation is the company’s only non-cash expense or revenue.
what is the company’s net cash flow?

a. $850 million

b. $650 million

c. $570 million

d. $450 million

e. $500 million

The correct answer is D.

Explanation:

Giving the following information:

Earnings before interest and taxes (EBIT) = $700 million.

Earnings before interest, taxes, depreciation and amortization (EBITDA) = $850 million.

Interest expense = $200 million.

The corporate tax rate is 40 percent.

First, we need to determine the depreciation expense.

Depreciation= EBITDA - EBIT= 850 - 700= 150million

Net cash flow= EBIT - Interest - Tax + Depreciation

EBIT= 700

Insterest= 200 million (-)

EBT= 500

Tax= 500*0.40= 200 (-)

Depreciation= 150 (+)

Net cash flow= 450 million

of the three mortgage options that demarco and tanya have to choose from, the balloon payment mortgage would be their best option, over adjustable payment and fixed payment plans.ultimately, the balloon payment plan would save demarco and tanya overall, in interest, would cost less monthly, and they would only have to make these payments for 8 years, opposing to 30 years for adjustable or fixed payment plans. 

overall, demarco and tanya would save $80,811 if they chose balloon payments over fixed payments, and would save $116,711 if they choose balloon payments over adjustable payments. benefits with choosing fixed payments over adjustable payments is that, in the end, the payments will still be $836.30 a month, while with adjustable payments, the initial monthly payments will be $763.38 to $1082.70 a month, ultimately leading to a more costly purchase. benefits with choosing fixed payments over balloon payments are not present. benefits in choosing adjustable payments over is that it has a lower interest rate, and starts with lower monthly payments initially. benefits in choosing adjustable payments over balloon payments include a lower interest rate, and lower initial monthly payments. benefits in choosing balloon payments over fixed payments include lower interest rates, lower overall price, lower monthly payments, takes less time to pay off, and does not require a downpayment. benefits in choosing balloon payments over adjustable payments include, lower monthly payments (when averaged), takes less time to pay off, and lower overall price.

hence, option c, balloon payments, is the best option for demarco and tanya to make this purchase, for it will save them a minimum of $80811, and a maximum of $116,711.