Question

8. Cardinal Industries had the following operating results for 2018: Sales = $35,025; Cost of goods sold = $24,555; Depreciation expense = $6,067; Interest expense = $2,745; Dividends paid = $2,059. At the beginning of the year, net fixed assets were $20,010, current assets were $7,103, and current liabilities were $4,034. At the end of the year, net fixed assets were $24,565, current assets were $8,726, and current liabilities were $4,736. The tax rate for 2018 was 24 percent.

a. What is net income for 2018? (Do not round intermediate calculations.)

b. What is the operating cash flow for 2018? (Do not round intermediate calculations.)

c. What is the cash flow from assets for 2018? (Do not round intermediate calculations. A negative answer should be indicated by a minus sign.)

d-1. If no new debt was issued during the year, what is the cash flow to creditors? (Do not round intermediate calculations.)

d-2. If no new debt was issued during the year, what is the cash flow to stockholders? (Do not round intermediate calculations. A negative answer should be indicated by a minus sign.)

Answer 1

Answer a.

EBIT = Sales - Cost of Goods Sold - Depreciation Expense
EBIT = $35,025 - $24,555 - $6,067
EBIT = $4,403

EBT = EBIT - Interest Expense
EBT = $4,403 - $2,745
EBT = $1,658

Taxes = EBT * Tax Rate
Taxes = $1,658 * 24%
Taxes = $397.92

Net Income = EBT - Taxes
Net Income = $1,658 - $397.92
Net Income = $1,260.08

Answer b.

Operating Cash Flow = EBIT + Depreciation Expense - Taxes
Operating Cash Flow = $4,403 + $6,067 - $397.92
Operating Cash Flow = $10,072.08

Answer c.

Change in Net Working Capital = Ending Net Working Capital - Beginning Net Working Capital
Change in Net Working Capital = (Ending Current Assets - Ending Current Liabilities) - (Beginning Current Assets - Beginning Current Liabilities)
Change in Net Working Capital = ($8,726 - $4,736) - ($7,103 - $4,034)
Change in Net Working Capital = $921

Net Capital Spending = Ending Net Fixed Assets + Depreciation - Beginning Net Fixed Assets
Net Capital Spending = $24,565 + $6,067 - $20,010
Net Capital Spending = $10,622

Cash Flow from Assets = Operating Cash Flow - Net Capital Spending - Change in Net Working Capital
Cash Flow from Assets = $10,072.08 - $10,622 - $921
Cash Flow from Assets = -$1,470.92

Answer d-1.

Cash Flow to Creditors = Interest Expense - Net New Long-term Debt
Cash Flow to Creditors = $2,745 - $0
Cash Flow to Creditors = $2,745

Answer d-2.

Cash Flow from Assets = Cash Flow to Creditors + Cash Flow to Stockholders
-$1,470.92 = $2,745 + Cash Flow to Stockholders
Cash Flow to Stockholders = -$4,215.92