Question

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Assume a company has sales of $423,800. Production costs of $297,400. Other expenses of $18,500. Depreciation...

Assume a company has sales of $423,800. Production costs of $297,400. Other expenses of $18,500. Depreciation expense of $36,300. Interest expense of $2,100. Taxes of $23,600. And dividends of $12,000. In addition, you're told that during the year the firm issued $4,500 in new equity and redeemed $6,500 in outstanding long-term debt. If net fixed assets increased by $7,400 during the year, what was the addition to net working capital?

(Please show work, Thanks!)

Expert Solution

Addition to Net Working Capital

Operating Cash Flow

Operating Cash Flow = Sales - Production Cost – Other Expenses – Income Tax Expenses

= $423,800 - $297,400 – $18,500 - $23,600

= $84,300

Net Capital Spending

Net Capital Spending = Increase in FA + Depreciation Expenses

= $7,400 + $36,300

= $43,700

Cash Flow to Creditors

Cash Flow to Creditors = Interest Expenses – Redemption of long term debt

= $2,100 – (-$6,500)

= $2,100 + $6,500

= $8,600

Cash flow to stockholders

Cash flow to stockholders = Dividend Paid - Equity shares issued

= $12,000 - $4,500

Cash Flow from Assets

Cash Flow from Assets = Cash flow to creditors + cash flow to stockholders

= $8,600 + $7,500

= $16,100

Therefore, the Addition to Net Working Capital = Operating Cash Flow – Net Capital Spending – Cash flow from assets

= $84,300 - $43,700 - $16,100

= $24,500

“Hence, the Addition to Net Working Capital would be $24,500"

jeff jeffy answered 1 year ago

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