Question

Square Hammer Corp. shows the following information on its 2018 income statement: Sales = $215,000; Costs = $104,000; Other expenses = $5,800; Depreciation expense = $9,000; Interest expense = $14,000; Taxes = $28,770; Dividends = $9,900. In addition, you're told that the firm issued $8,000 in new equity during 2018 and redeemed $9,600 in outstanding long-term debt.

What is the 2018 cash flow to stockholders?

If net fixed assets increased by $27,000 during the year, what was the addition to NWC?

Bishop, Inc., is obligated to pay its creditors $7,400 during the year.

a.	What is the market value of the shareholders' equity if assets have a market value of $10,200?

What if assets equal $6,500?

Answer 1

a. Cash flow to stockholders = dividends - new equity issued

Cash flow to stockholders = 9900 - 8000

Cash flow to stockholders = $1900

b. Cash flow from assets = cash flow to creditors + cash flow to stockholders

Cash flow from assets = 14000 + 9600 + 1900

Cash flow from assets = $25500

Cash flow from assets = Operating cash flow - change in NWC - net capital spending

Cash flow from assets = 215000 - 104000 - 5800 - 28770 - change in NWC - 9000 - 27000

25500 = 40430 - change in NWC

Change in NWC = 14930 Option 1

a. market value of stockholders' equity = Assets - creditors

market value of stockholders' equity = 10200 - 7400

market value of stockholders' equity = 2800

b. market value of stockholders' equity = Assets - creditors

market value of stockholders' equity = 6500 - 7400

market value of stockholders' equity = -900 (it means the equity has negative value or the firm is in bankruptcy situation)

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