Question

Problem 2-17 Accounting Values versus Cash Flows [LO2]

During 2018, Raines Umbrella Corp. had sales of $710,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $500,000, $125,000, and $170,000, respectively. In addition, the company had an interest expense of $60,000 and a tax rate of 21 percent. (Ignore any tax loss carryforward provisions and assume interest expense is fully deductible.)

   

Suppose the company paid out $60,000 in cash dividends. If net capital spending and net working capital was zero, and if no new stock was issued during the year, what is the net new long-term debt? (Do not round intermediate calculations.)

Answer 1

Operating Cash Flow = Earnings before Interest and Taxes - Income Tax + Depreciation Expense
Operating Cash Flow = -$85,000 - $0 + $170,000
Operating Cash Flow = $85,000

Cash Flow from Assets = Operating Cash Flow - Net Capital Spending and NWC
Cash Flow from Assets = $85,000 - $0
Cash Flow from Assets = $85,000

Cash Flow to Stockholders = Dividends - Net New Equity
Cash Flow to Stockholders = $60,000 - $0
Cash Flow to Stockholders = $60,000

Cash Flow from Assets = Cash Flow to Creditors + Cash Flow to Stockholders
$85,000 = Cash Flow to Creditors + $60,000
Cash Flow to Creditors = $25,000

Cash Flow to Creditors = Interest Expense - Net New Long-term Debt
$25,000 = $60,000 - Net New Long-term Debt
Net New Long-term Debt = $35,000