Question

please write in text not in handwriting since its hard to read from a paper pic and i need an explanation for each problem thank you

1. Prepare an amortization schedule for a 5-year loan of $87,000. The interest rate is 7% with equal monthly payments How much interest is paid during the first year?

2. Prescott Football Manufacturing had the following operating results for 2019: Sales = $29,874; Cost of Goods Sold = $21,632; Depreciation Expense = $3,470; Interest Expense = $514; Dividends Paid = $825. At the beginning of the year, Net Fixed Assets were $19,872; Current Assets were $3,557; and Current Liabilities were $3,110. At the end of the year, Net Fixed Assets were $22,987; Current Assets were $4,381; and Current Liabilities were $2,981. The Tax Rate for 2019 was 24 percent.

1. What is net income for 2019?
2. What is the operating cash flow for 2019?
3. What is the cash flow from assets for 2019? Is this possible? Explain.
4. If no new debt was issued during the year, what is the cash flow to creditors? What is the cash flow to stockholders?

Answer 1

1). Monthly payment calculation:

PV (loan amount) = 87,000; N (number of payments) = 5*12 = 60; rate (monthly rate) = APR/12 = 7%/12 = 0.5833%, solve for PMT.

Monthly payment = 1,722.70

Amortization schedule:

The monthly payment remains same throughout. (PMT = 1,722.70)

Interest is calculated using the monthly rate (calculated above) and the previous outstanding balance. (For example, Interest for n = 3 is 0.5833%*B2 = 0.5833%*84,562.50 = 493.28)

Principal = monthly payment - interest (For example, Principal for n = 3 is PMT - Interest3 = 1,722.70 - 493.28 = 1,229.42)

Outstanding balance at the end of each period is last outstanding balance - principal paid in this period (For example, B3 = B2 - P3 = 84,562.50-1,229.42 = 83,333.08)

2a). Net income for 2019 = 3,236

b). Operating cash flow = Gross profit*(1-Tax rate) + Depreciation*Tax rate

= 8,242*(1-24%)+(3,470*24%) = 7,097

c). Cash flow from assets (or free cash flow) = Operating cash flow - change in net working capital - investment in fixed assets

Change in NWC = NWC at the end of the year - NWC at the beginning of the year

= (4,381-2,981) - (3,557-3,110) = 953

Investment in fixed assets = Net fixed asset at the end of the year - Net fixed asset at the beginning of the year + Depreciation expense for the year

= 22,987-19,872 + 3,470 = 6,585

Cash flow from assets = 7,097-953-6,585 = -441

This is possible if the company invests heavily in working capital and fixed assets so that even when operating cash flow is positive, cash flow from assets turns negative.

d). Cash flow to stockholders = dividends paid for the year = 825 (assuming no other equity change has happened during the year)

Cash flow to creditors = cash flow from assets - cash flow to stockholders

= -441-825 = -1,266