Question

The 2008 balance sheet of Maria's Tennis Shop, Inc., showed $2.95 million in long-term debt, $710,000 in the common stock account, and $6.5 million in the additional paid-in surplus account. The 2009 balance sheet showed $4.05 million, $905,000, and $8.25 million in the same three accounts, respectively. The 2009 income statement showed an interest expense of $360,000. The company paid out $590,000 in cash dividends during 2009. If the firm's net capital spending for 2009 was $760,000, and the firm reduced its net working capital investment by $135,000, the firm's 2009 operating cash flow, or OCF?

$-1,470,000

$-2,095,000

$-3,900,000

$2,365,000

$-2,650,000

Answer 1

Cash Flow to Stockholders = Dividend - Net New Equity
Cash Flow to Stockholders = Dividend - (Ending Common Stock + Ending Additional Paid-in Surplus Account - Beginning Common Stock - Beginning Additional Paid-in Surplus Account)
Cash Flow to Stockholders = $590,000 - ($905,000 + $8,250,000 - $710,000 - $6,500,000)
Cash Flow to Stockholders = -$1,355,000

Cash Flow to Creditor = Interest - Net New Long-term Debt
Cash Flow to Creditor = Interest - (Ending Long-term Debt - Beginning Long-term Debt)
Cash Flow to Creditor = $360,000 - ($4,050,000 - $2,950,000)
Cash Flow to Creditor = -$740,000

Cash Flow from Assets = Cash Flow to Stockholders + Cash Flow to Creditors
Cash Flow from Assets = (-$1,355,000) + (-$740,000)
Cash Flow from Assets = -$2,095,000

Cash Flow from Assets = OCF - Net Capital Spending - Change in NWC
-$2,095,000 = OCF - $760,000 - (-$135,000)
-$2,095,000 = OCF - $760,000 + $135,000
OCF = -$1,470,000

The OCF of the firm during 2009 is -$1,470,000