Question

During 2015, Rainbow Umbrella Corp. had sales of $800,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $580,000, $90,000, and $150,000, respectively. In addition, the company had an interest expense of $89,000 and a tax rate of 35 percent. (Ignore any tax loss carryback or carryforward provisions.)

   

Suppose the company paid out $53,000 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.)

  

Net new long-term debt

$

Answer 1

a	Income Statement
	Sales	$   800,000
	Cost of goods sold	580,000
	Administrative and Selling expenses	90,000
	Depreciation	150,000
	EBIT	(20,000)
	Interest	89,000
	Taxable income	(109,000)
	Taxes (35%)	-
	Net income	$ (109,000)
	The taxes are zero since we are ignoring any carryback or carryforward provisions.
	The operating cash flow for the year was:
	OCF = EBIT + Depreciation – Taxes
	OCF = -$20,000 + 150,000 – 0
	OCF = $130,000
	Net income was negative because of the tax deductibility of depreciation and interest expense. However, the actual cash flow from operations was positive because depreciation is a non-cash expense and interest is a financing, not an operating, expense.
	Cash available after interest payment	41000
	dividend payment	53000
	Shortfall(Net new long term debt)	$12,000.00	Ans

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