During 2014, Raines Umbrella Corp. had sales of $634503. Cost of goods sold, adm

Question

During 2014, Raines Umbrella Corp. had sales of $634503. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $531060, $85763, and $81354, respectively. In addition, the company had an interest expense of $88274 and a tax rate of 33 percent. (Ignore any tax loss carryback or carryforward provisions. This means that if the company does not have any taxable income, they do not pay any tax.) Suppose Raines Umbrella Corp. paid out $57081 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 is the net new long-term debt?

Explanation / Answer

Solution:

Particulars Amount Sales 6,34,503 Less: cost of goods sold 5,31,060 Less: Administrative and selling expenses 85,763 Less: Depreciation 81,354 Earning before interest and tax (EBIT) (63,674) Less: Interest 88,274 Earning before Tax (EBT) (1,51,948) Less : Tax @33%* Nil Earning after Tax (1,51,948) *Tax would be zero as earning after tax is negetive statement showing firm's new long term debt Particulars Amount Sales 6,34,503 Less: cost of goods sold 5,31,060 Less: Administrative and selling expenses 85,763 Operating cash flows 17,680 Less : Interest 88,274 Amount short for payment of interest (A) 70,594 Dividend paid(B)** 57,081 Funds required i.e. new debt to be issued 1,27,675 **Cash flows is positive so company can pay dividend

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