During 2019, Rainbow Umbrella Corp. had sales of $740,000. Cost of goods sold, administrative and selling...

During 2019, Rainbow Umbrella Corp. had sales of $740,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $540,000, $85,000, and $100,000, respectively. In addition, the company had an interest expense of $54,000 and a tax rate of 21 percent. (Assume that interest is fully deductible.) Suppose the company paid out $66,000 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 was the net new long-term debt? (Do not round intermediate calculations.)

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Expert Solution

Answer:

Income Statement
Sales	740000
Less: Cost of goods sold	(540000)
Administrattive & Selling expenses	(85000)
Depreciation	(100000)
Earninigs before Interest and Taxes (EBIT)	15000
Less: Interest Expenses	(54000)
Taxable Income	(39000)
Less: Taxes (21%)	0
Net income	(39000)

Operating Cash Flow (OCF) = EBIT + Depreciation - Taxes
=15000+100000-0
=115000

Cash dividends paid is $66000

Here the firms net income is negative but it is still positive for the company to pay out $66000 in cash dividends. It just has to be sure there is suffucuent cash flows to make the dividend payments.

According to the question

Change in NWC = Net Capital spending = Net new equity = 0
Cash flow from assets = OCF - Change in NWC - Net Capital spending
=115000-0-0
=115000

Cash flows to stockholders = Dividends - Net new equity
=66000-0
=66000

Then we can get the cash flow to creditors by using:

Cash flows to creditors = cash flows from assets - Cash flow to stockholders
=115000-66000
=49000

On the other hand,

Cash flow to creditors = Interest - net new long-term debt
Net new Long term debtr = interest - Cash flows to creditors
=54000-49000
=5000

Thus, from the given information the net new long-term debt is $5000

ekkarill92 answered 1 year ago

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