Question

5) Ledger Properties has the following financial information:

   Current Year Prior Year

Revenues $ 48,915 $ 43,610

Administrative expenses 12,106    11,602

Interest expense    816 468

Cost of goods sold    29,715 26,309

Depreciation 1,408    1,387

Net fixed assets    32,711 31,984

Current liabilities    14,652    14,625

Common stock    15,000 14,000

Current assets 16,506    14,687

Long-term debt 12,200 ?

Retained earnings 7,365 4,246

Dividends paid    290    275

What is the cash flow of the firm for the current year if the tax rate is 22 percent?

A) $1,885

B) $1,042

C) $2,297

D) $2,096

E) $2,517

Answer 1

Answer:

Cash Flow of the Firm is Cash Flow from Assets.

Cash Flow from Assets = Operating Cash Flow – Net Capital Spending – Change in NWC

Operating Cash Flow = EBIT + Depreciation – Taxes
EBIT = Revenue – Cost of Goods Sold – Administrative Expenses – Depreciation
EBIT = $48,915 - $29,715 - $12,106 - $1,408
EBIT = $5,686

Income before Taxes = EBIT – Interest Expense
Income before Taxes = $5,686 - $816
Income before Taxes = $4,870

Taxes = $4,870 * 22% = $1,071.40

Operating Cash Flow = $5,686 + $1,408 - $1,071.40
Operating Cash Flow = $6,022.60

Net Capital Spending = Ending FA – Beginning FA + Depreciation
Net Capital Spending = $32,711 - $31,984 + $1,408
Net Capital Spending = $2,135

Change in Net Working Capital = (Ending CA – Ending CL) – (Beginning CA – Beginning CL)
Change in Net Working Capital = ($16,506 - $14,652) – ($14,687 - $14,625)
Change in Net Working Capital = $1,792

Cash Flow from Assets = $6,022.60 - $2,135 - $1,792
Cash Flow from Assets = $2,095.60
or Cash Flow from Assets = $2,096

Option D is Correct.