Question

In: Finance

15) ABC Inc. has a net income of $1,000. The tax rate is 21% and the...

15) ABC Inc. has a net income of $1,000. The tax rate is 21% and the firm made an interest payment of $250 during the year. The depreciation for the year was $200. During the year, the net fixed assets increased by $500. Cash increased by $50, inventories decreased by $75, receivables increased by $100, payables declined by $125, and the short term debt for the company increased by 150. The firm saw its common stock and paid in surplus increase by $300. The firm pays out half its earnings as dividends.

a) What is the cash flow from assets?

b) What is the change in long-term debt?

c) What is the cash flow to stockholders?

Please show the calculations. Thank you in advance.

Expert Solution

Earnings before taxes = Net income / (1 - Tax rate)
Earnings before taxes = $1,000 / (1 - 0.21)
Earnings before taxes = $1,266

Taxes = Earnings before taxes - Net income
Taxes = $1,266 - $1,000
Taxes = $266

Earnings before interest and taxes = Earnings before taxes + Interest expenses
Earnings before interest and taxes = $1,266 + $250
Earnings before interest and taxes = $1,516

Operating cash flows = Earnings before interest and taxes + Depreciation expense - Taxes
Operating cash flows = $1,516 + $200 - $266
Operating cash flows = $1,450

Dividends = 50% * Net income
Dividends = 50% * $1,000
Dividends = $500

Net capital spending = Increase in net fixed assets + Depreciation expense
Net capital spending = $500 + $200
Net capital spending = $700

Change in NWC = Increase in cash - Decrease in inventory + Increase in receivables + Decrease in payables - Increase in short-term debt
Change in NWC = $50 - $75 + $100 + $125 - $150
Change in NWC = $50

Answer a.

Cash flow from assets = Operating cash flows - Change in NWC - Net capital spending
Cash flow from assets = $1,450 - $50 - $700
Cash flow from assets = $700

Answer c.

Cash flow to stockholders = Dividends - Increase in common stock and paid-in surplus
Cash flow to stockholders = $500 - $300
Cash flow to stockholders = $200

Answer b.

Cash flow to creditors = Cash flow from assets - Cash flow to stockholders
Cash flow to creditors = $700 - $200
Cash flow to creditors = $500

Cash flow to creditors = Interest expense - Change in long-term debt
$500 = $250 - Change in long-term debt
Change in long-term debt = -$250

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