During 2015, Rainbow Umbrella Corp. had sales of $800,000. Cost of goods sold, a

Question

During 2015, Rainbow Umbrella Corp. had sales of $800,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $580,000, $90,000, and $150,000, respectively. In addition, the company had an interest expense of $89,000 and a tax rate of 35 percent. (Ignore any tax loss carryback or carryforward provisions.)

   

Suppose the company paid out $53,000 in cash dividends. If spending on net fixed assets and net working capital was zero, and if no new stock was issued during the year, what was the net new long-term debt? (Do not round intermediate calculations.)

  

During 2015, Rainbow Umbrella Corp. had sales of $800,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $580,000, $90,000, and $150,000, respectively. In addition, the company had an interest expense of $89,000 and a tax rate of 35 percent. (Ignore any tax loss carryback or carryforward provisions.)

Explanation / Answer

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a Income Statement   Sales $   800,000   Cost of goods sold       580,000   Administrative and Selling expenses        90,000   Depreciation       150,000   EBIT       (20,000)   Interest        89,000   Taxable income      (109,000)   Taxes (35%)               -     Net income $ (109,000) The taxes are zero since we are ignoring any carryback or carryforward provisions. The operating cash flow for the year was: OCF = EBIT + Depreciation – Taxes OCF = -$20,000 + 150,000 – 0 OCF = $130,000 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. Cash available after interest payment 41000 dividend payment 53000 Shortfall(Net new long term debt) $12,000.00 Ans

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