During 2018, Raines Umbrella Corp. had sales of $870,000. Cost of goods sold, ad

Question

During 2018, Raines Umbrella Corp. had sales of $870,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $680,000, $85,000, and $165,000, respectively. In addition, the company had an interest expense of $53,000 and a tax rate of 21 percent. (Ignore any tax loss carryforward provisions and assume interest expense is fully deductible.) Suppose the company paid out $67,000 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 net new long-term debt?

Explanation / Answer

tax=max(0,870000-680000-85000-165000-53000)*(21%))=0
Hence, Net Income=870000-680000-85000-165000-53000=-113000
Cash flow from operations=-113000+165000=52000
Cash flow from operations (indlucing dividends)=52000-67000=-15000
Hence, Cash flow from finnacing must be 15000
SO, net long term debt would increase by 15000

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