Question

1. Bayern co. shows the flowing information on its 2010 income statements: Sales = $153,000;

costs = $81,900; other expenses = $52,000; depreciation expenses = $10,900; interest expense = $8,400’ taxes = $16,330; dividends = $7,200. In addition, you are told that the firm issues $2,600 in new equity during 2010, and redeemed $3,900 in outstanding long-term debt.

1. What is the 2010 operating cash flow?
2. What is the 2010 cash flow to creditors?
3. What is the 2010 cash flow to stockholders?
4. If net fixed assets increased by $20,250 during the year, what was the Net Working Capital?

Answer 1

a. To calculate the OCF, we first need to construct an income statement. The income statement starts with revenues and subtracts costs to arrive at EBIT. We then subtract out interest to get taxable income, and then subtract taxes to arrive at net income. Doing so, we get:                                                             Income Statement                                                         Sales                $153,000                                                           Costs                 81,900                                                                   Other Expenses   5,200                                           Depreciation       10,900                                                                 EBIT                 $55,000                                           Interest              8,400                                                      Taxable income   $46,600                                               Taxes            16,330                                           Net income         $30,270                                                    Dividends         $7,200                                         Addition to retained earnings         23,070                                                 Dividends paid plus addition to retained earnings must equal net income, so: Net income = Dividends + Addition to retained earnings Addition to retained earnings = $30,270 – 7,200 Addition to retained earnings = $23,070                                     So, the operating cash flow is:                         OCF = EBIT + Depreciation – Taxes                         OCF = $55,000 + 10,900 – 16,330                         OCF = $49,570         b. The cash flow to creditors is the interest paid, minus any new borrowing. Since the company redeemed long-term debt, the net new borrowing is negative. So, the cash flow to creditors is:                         Cash flow to creditors = Interest paid – Net new borrowing                         Cash flow to creditors = $8,400 – (–$3,900)                         Cash flow to creditors = $12,300 c. The cash flow to stockholders is the dividends paid minus any new equity. So, the cash flow to stockholders is:             Cash flow to stockholders = Dividends paid – Net new equity                         Cash flow to stockholders = $7,200 – 2,600                         Cash flow to stockholders = $4,600         d. In this case, to find the addition to NWC, we need to find the cash flow from assets. We can then use the cash flow from assets equation to find the change in NWC. We know that cash flow from assets is equal to cash flow to creditors plus cash flow to stockholders. So, cash flow from assets is:                         Cash flow from assets = Cash flow to creditors + Cash flow to                                                                                       stockholders                                       Cash flow from assets = $12,300 + 4,600                         Cash flow from assets = $16,900             Net capital spending is equal to depreciation plus the increase in fixed assets, so:                         Net capital spending = Depreciation + Increase in fixed assets                         Net capital spending = $10,900 + 19,475                         Net capital spending = $30,375             Now we can use the cash flow from assets equation to find the change in NWC. Doing so, we find:             Cash flow from assets = OCF – Change in NWC – Net capital spending                         $16,900 = $49,570 – Change in NWC – $30,375             Change in NWC = $2,295