Question

3. Assuming that the tax rate is 20%, answer the questions below.

2018 2019
Sales 4,200 4,800
Cost of Goods Sold 2,000 2,500
Interest 400 500
Dividends 200 300
Depreciation 300 400
Cash 250 300
Account Receivables 300 400
Account Payables 900 1,000
Inventory 1,000 1,500
Long-term Debt 3,300 4,000
Net Fixed Assets 6,000 6,500

(1) (5 points) What is the firm’s cash flow from assets for 2019?
(2) (3 points) What is the value of cash flow to bondholders for 2019?
(3) (5 points) What is the value of cash flow to stockholders for 2019?
You are NOT allowed to use the cash flow identity for this problem.

Could you explain in detail with formula

Answer 1

Answer a.

Operating Cash Flows = EBIT - Taxes + Depreciation
Operating Cash Flows = $1,900 - $280 + $400
Operating Cash Flows = $2,020

Increase in NWC = NWC, 2019 - NWC, 2018
Increase in NWC = (Current Assets, 2019 - Current Liabilities, 2019) - (Current Assets, 2018 - Current Liabilities, 2018)
Increase in NWC = ($2,200 - $1,550) - ($1,000 - $900)
Increase in NWC = $550

Net Capital Spending = Net Fixed Assets, 2019 + Depreciation, 2019 - Net Fixed Assets, 2018
Net Capital Spending = $6,500 + $400 - $6,000
Net Capital Spending = $900

Cash Flow from Assets = Operating Cash Flows - Increase in NWC - Net Capital Spending
Cash Flow from Assets = $2,020 - $550 - $900
Cash Flow from Assets = $570

Answer b.

Net New Long-term Debt = Long-term Debt, 2019 - Long-term Debt, 2018
Net New Long-term Debt = $4,000 - $3,300
Net New Long-term Debt = $700

Cash Flow to Bondholders = Interest Expense - Net New Long-term Debt
Cash Flow to Bondholders = $500 - $700
Cash Flow to Bondholders = -$200

Answer c.

Net New Equity = Owner’s Equity, 2019 - Owner’s Equity, 2018 - Net Income, 2019 + Dividends, 2019
Net New Equity = $3,700 - $3,350 - $1,120 + $300
Net New Equity = -$470

Cash Flow to Stockholders = Dividends - Net New Equity
Cash Flow to Stockholders = $300 - (-$470)
Cash Flow to Stockholders = $770