During 2009, Raines Umbrella Corp. had sales of $747,000. Cost of goods sold, ad
ID: 2817060 • Letter: D
Question
During 2009, Raines Umbrella Corp. had sales of $747,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $579,000, $103,000, and $135,000, respectively. In addition, the company had an interest expense of $99,000 and a tax rate of 30 percent. (Ignore any tax loss carryback or carryforward provisions.) Assume Raines Umbrella Corp. paid out $16,000 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 is the firm's net new long-term debt?
Explanation / Answer
Income Statement
-$169,000
-$169,000
OCF = EBIT + Depreciation – Taxes
= –$70,000 + 135,000 – 0 = $65,000
A firm can still pay out dividends if net income is negative; it just has to be sure there is sufficient cash flow to make the dividend payments.
Change in NWC = Net capital spending = Net new equity = 0. (Given)
Cash flow from assets = OCF – Change in NWC – Net capital spending
= $65,000 – 0 – 0 = $65,000
Cash flow to stockholders = Dividends – Net new equity
= $16,000 – 0 = $16,000
Cash flow to creditors = Cash flow from assets – Cash flow to stockholders
= $65,000 – 16,000 = $49,000
Cash flow to creditors = Interest – Net new LTD
Net new LTD = Interest – Cash flow to creditors
= $99,000 – 49,000 = $50,000
Sales $747,000 Less: COGS $579,000 Less: A&S Expenses $103,000 Less: Depreciation $135,000 EBIT -$70,000 Less: Interest $ 99,000 Taxable Income-$169,000
Less: Taxes $0 Net Income-$169,000
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