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During the year, Belyk Paving Co. had sales of $2,387,000. Cost of goods sold, administrative and...

During the year, Belyk Paving Co. had sales of $2,387,000. Cost of goods sold, administrative and selling expenses, and depreciation expense were $1,438,000, $436,300, and $491,300, respectively. In addition, the company had an interest expense of $216,300 and a tax rate of 40 percent (ignore any tax loss carryback or carryforward provisions.). The company paid out $384,000 in cash dividends. Assume that net capital spending was zero, no new investments were made in net working capital, and no new stock was issued during the year.

Calculate the firm's net new long-term debt added during the year. (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

Net new long-term debt $

(Anyone can help me with this, all the answers I found are wrong...)

Expert Solution

Particulars	Amount
Sales	$2,387,000
COGS	($1,438,000)
Administrative & Selling Expenses	($436,300)
Depreciation	($491,300)
EBIT	$21,400
Interest	($216,300)
Taxable Income	-$194,900
Taxes (40%)	0
Net Income	-$194,900

The taxes are zero since we are ignoring any carry-back or carry-forward provisions.

OCF = EBIT + Depreciation – Taxes

= $21,400 + 491,300 – 0 = $512,700

Net income was negative because of the tax deductibility of depreciation and interest expense. However, the actual cash flow from operations was positive because depreciation is a non-cash expense and interest is a financing, not an operating, expense.

A firm can still pay out dividends if net income is negative; it just has to be sure there is sufficient cash flow to make the dividend payments. The assumptions made in the question are:

Change in NWC = Net capital spending = Net new equity = $0

To find the new long-term debt, we first need to find the cash flow from assets.

Cash flow from assets = OCF – Change in NWC – Net capital spending

= $512,700 - $0 - $0 = $512,700

Cash flow to stockholders = Dividends – Net new equity = $384,000 – $0 = $384,000

Cash flow from assets = Cash flow to creditors + Cash flow to stockholders

$512,700 = Cash flow to creditors + $384,000

Cash flow to creditors = $512,700 - $384,000 = $128,700

Cash flow to creditors = Interest – Net new long-term debt

$128,700 = $216,300 – Net new long-term debt

Net new long-term debt = $216,300 - $128,700 = $87,600

jeff jeffy answered 1 year ago

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