During 2010, Raines Umbrella Corp. had sales of $810,000. Cost of goods sold, ad

Question

During 2010, Raines Umbrella Corp. had sales of $810,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $580,000, $90,000, and $135,000, respectively. In addition, the company had an interest expense of $91,000 and a tax rate of 35 percent. (Ignore any tax loss carryback or carryforward provisions.) Suppose Raines Umbrella Corp. paid out $55,000 in cash dividends. Is this possible? If spending on net fixed assets and net working capital was zero, and if no new stock was issued during the year, what is the net new long-term debt?

Explanation / Answer

FOLLOW THIS EXAMPLE The amount of long term debt on a company's balance sheet is crucial. It refers to money the company owes that it doesn't expect to pay off in the next year. Long term debt consists of things such as mortgages on corporate buildings and / or land, as well as business loans. A great sign of prosperity is when a balance sheet shows the amount of long term debt has been decreasing for one or more years. When debt shrinks and cash increases, the balance sheet is said to be "improving". When it's the other way around, it is said to be "deteriorating". Companies with too much long term debt will find themselves overwhelmed with interest payments, a risk of having too little working capital, and ultimately, bankruptcy. Thankfully, there is a financial tool that can tell you if a business has borrowed too much money.

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