Question

During 2009, Raines Umbrella Corp. had sales of $740,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $574,000, $89,000, and $128,000, respectively. In addition, the company had an interest expense of $100,000 and a tax rate of 30 percent. (Ignore any tax loss carryback or carryforward provisions.) Assume Raines Umbrella Corp. paid out $19,000 in cash dividends. If spending on net fixed assets and net working capital was zero, and if no new stock was issued during the year, what is the firm's net new long-term debt? Answer Choices: a) 96,000 b) 77,450 c) 42,000 d) 21,500 e) 0

Answer 1

Option C i.e. 42,000 is correct option. Firm's new long term debt is 42,000

Solution:

Particulars	Amount
Sales	740,000
Less: Cost of Goods Sold	574,000
Less: Administrative Expenses	89,000
Less: Depreciation	128,000
Earning before Interest and Tax (EBIT)	(51,000)
Less: Interest	100,000
Earning before Tax (EBT)	(151,000)
Tax @ 30%	-
Earning after Tax (EAT)	(151,000)
* Tax would be zero as Earning Before Tax is negetive
Statement showing firm's new long term debt
Particulars	Amount
Sales	740,000
Less: Cost of Goods Sold	574,000
Less: Administrative Expenses	89,000
Operating Cash Flows	77,000
Less: Interest	100,000
Amount short for payment of interest (A)	23,000
Dividend Paid ** (B)	19,000
Funds required i.e New Debt to be issued (A)+(B)	42,000
** Cash Flows is positive so company can pay dividend