5. Titan football Manufacturing had the following operating results for 2014: sa

Question

5. Titan football Manufacturing had the following operating results for 2014: sales $10,980; cost of goods sold = $8,100, depreciation expense-$1,440, interest expense $180; dividends paid - $270. At the beginning of the year, net fixed assets were $7,200, current assets were $1,800, and current liabilities were $1,350. At the end of the year, net fixed assets were $7,560, current assets were $2,790, and current liabilities were $1,620. The tax rate for 2014 was 35 percent. a. What is net income for 2014? b. What is the operating cash flow for 2014? c. What is the cash flow from assets for 2014? Is this possible? Explain. d. If no new debt was issued during the year, what is the cash flow to creditors? What is the cash flow to stockholders? Explain and interpret the positive and negative signs of your answers in (a) and (b).

Explanation / Answer

Sales

10980

COGS

8100

Depreciation

1440

EBIT

1440

Interest

180

Tax

441

Net Income

819

Dividend

270

       = 10980-8100-1440-180-441

       = 819

= 1440+1440-441

= 2439

The change in net working capital was:

Change in NWC = NWCend – NWCbeg

Change in NWC = (CAend – CLend) – (CAbeg – CLbeg)

Change in NWC = ($2790 – $1620) – ($1800 – $1350)

Change in NWC = $720

And the net capital spending was:

Net capital spending = NFAend – NFAbeg + Depreciation

Net capital spending = $7560 – 7200 + 1440

Net capital spending = $1800

So, the cash flow from assets was:

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

Cash flow from assets = $2439 – 720 – 1800

Cash flow from assets = –$81

The cash flow from assets can be positive or negative, since it represents whether the firm raised funds or distributed funds on a net basis. In this problem, even though net income and OCF are positive, the firm invested heavily in both fixed assets and net working capital; it had to raise a net $81 in funds from its stockholders and creditors to make these investments.

Cash flow to creditors = Interest – Net new LTD

Cash flow to creditors = $180 – 0

Cash flow to creditors = $180

Rearranging the cash flow from assets equation, we can calculate the cash flow to stockholders as:

Cash flow from assets = Cash flow to stockholders + Cash flow to creditors –$81 = Cash flow to stockholders + $180

Cash flow to stockholders = –$261

Sales

10980

COGS

8100

Depreciation

1440

EBIT

1440

Interest

180

Tax

441

Net Income

819

Dividend

270

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