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The 2017 balance sheet of Kerber’s Tennis Shop, Inc., showed $2.25 million in long-term debt, $730,000...

The 2017 balance sheet of Kerber’s Tennis Shop, Inc., showed $2.25 million in long-term debt, $730,000 in the common stock account, and $6.4 million in the additional paid-in surplus account. The 2018 balance sheet showed $3.9 million, $955,000, and $8.65 million in the same three accounts, respectively. The 2018 income statement showed an interest expense of $200,000. The company paid out $620,000 in cash dividends during 2018. If the firm's net capital spending for 2018 was $760,000, and the firm reduced its net working capital investment by $165,000, what was the firm's 2018 operating cash flow, or OCF?

Multiple Choice

  • $-2,710,000

  • $-5,140,000

  • $-3,305,000

  • $3,635,000

  • $-3,950,000

Solutions

Expert Solution

Net New Long-term Debt = Long-term Debt, 2018 - Long-term Debt, 2017
Net New Long-term Debt = $3,900,000 - $2,250,000
Net New Long-term Debt = $1,650,000

Cash Flow to Creditors = Interest Expense - Net New Long-term Debt
Cash Flow to Creditors = $200,000 - $1,650,000
Cash Flow to Creditors = -$1,450,000

Net New Equity = Common Stock, 2018 + Additional Paid-in Surplus, 2018 - Common Stock, 2017 - Additional Paid-in Surplus, 2017
Net New Equity = $955,000 + $8,650,000 - $730,000 - $6,400,000
Net New Equity = $2,475,000

Cash Flow to Stockholders = Dividends - Net New Equity
Cash Flow to Stockholders = $620,000 - $2,475,000
Cash Flow to Stockholders = -$1,855,000

Cash Flow from Assets = Cash Flow to Creditors + Cash Flow to Stockholders
Cash Flow from Assets = -$1,450,000 - $1,855,000
Cash Flow from Assets = -$3,305,000

Cash Flow from Assets = Operating Cash Flow - Net Capital Spending - Net Increase in NWC
-$3,305,000 = Operating Cash Flow - $760,000 - (-$165,000)
Operating Cash Flow = -$2,710,000


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