During 2018, Raines Umbrella Corp. had sales of $705,000. Cost of goods sold, ad

Question

During 2018, Raines Umbrella Corp. had sales of $705,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $445,000, $95,000, and $140,000, respectively. In additión, the company had an interest expense of $70,000 and a tax rate of 25 percent. (Ignore any tax loss carryforward provisions and assume interest expense is fully deductible.) Suppose Raines Umbrella Corp. paid out $102,000 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? (Do not round intermediate calculations.) Net new long-term debt

Explanation / Answer

1. Computation of Net Income/Loss

Net Income/ Loss = (Sales - COGS - Selling Expenses - Depreciation - Interest) * (1 - Tax)

Net Income/ Loss = (705000 - 445000 - 95000 - 140000 - 70000) * (1-0.25)

Net Income/ Loss = -45000 (There will be no tax in loss)

2. Operating Cash Flow = Net Income + Depreciation + Interest

Operating Cash Flow = -45000 + 140000 + $70000 = $165000

3. Net New Long term debt = - OCF + Dividends + Interest

Net New Long term debt = - 165000 + 102000 + 70000

Net New Long term debt = $7000

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