Question

Consider the following information for Smiths Trucking (tax rate is 40%):

	2016	2017
Sales	1,500	1,800
Cost of goods sold (excluding depreciation)	700	850
Depreciation	200	250
Selling, general, and admin. expense	100	150
Interest expense	50	50
Dividends	60	80
Current assets	1,200	1,220
Net fixed assets	3,000	3,500
Current liabilities	300	400
Long-term debt	1,000	1,200
Common stock	1,500	1,500
Retained earnings	1,400	1,620

Calculate the following for 2016:

(a) Cash flow to creditors (1 point)

(b) Cash flow to stockholders (1 point)

(c) Operating cash flow (2 points)

Answer 1

(a) Cash flow to Creditors:

Cash flow to Creditors or debt holders

The beginning value in 2017 for 'Long Term Debt' is same as the ending value in 2016.

Thus, Cash flow to Creditors

(b) Cash flow to stockholders: The cash flow to the stock holders is the amount of cash that a company gives to its stock holders (or share holders). It generally is the dividends paid by the company. However, in cases where the company buys back shares from the investors, that particular amount is subtracted from the dividends paid to calculate the Cash Flow to share holders.

In this case, the amount that company pays out to their stock holders (or share holders) is the dividends.

Thus Cash flow to stockholders .

(c) Operating Cash Flow:

Operating Cash flow

In our cases, the individual components for 2016 are calculated as follows:

Taxes are calculated on Earnings net of all expenses i.e., on . It is calculated as shown below.

Adding to we get the Operating Cash flow as