Concept explainers
Calculating Cash Flows Cusic Industries had the following operating results for 2015: sales = $20,300; cost of goods sold= $14,500;
- a. What is net income for 2015?
- b. What is the operating cash flow for 2015?
- c. What is the cash flow from assets for 2015? 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) through (d).
a)
To calculate: The net income for 2015.
Answer to Problem 20QP
Solution: The net income of the company for the year 2015 is $1,326.
Explanation of Solution
Given information:
Company C has sales of $20,300, cost of goods sold of $14,500, depreciation of $2,900, interest expenses of $690, dividend of $660. Opening fixed assets are $15,470, current assets are $4,630, and current liabilities are $2,520.
Closing net fixed assets are $17,120, current assets are $5,345, and current liabilities are $2,785.
The taxes are at the rate of 40%.
Compute the net income of Company C:
Income statement | ||
Particulars | Amount | Amount |
Net sales | $20,300 | |
Less: | ||
Costs | $14,500 | |
Depreciation | $2,900 | $17,400 |
Earnings before interest and taxes | $2,900 | |
Less: Interest paid | $690 | |
Taxable income | $2,210 | |
Less: Taxes ($2,210×40%) | $884 | |
Net income | $1,326 |
Hence, the net income is $1,326.
b)
To calculate: The operating cash flow for 2015.
Answer to Problem 20QP
The operating cash flow of Company C is$4,916.
Explanation of Solution
Given information:
The earnings before interest and taxes are $2,900, depreciation are $2,900, and taxes are $884.
(Refer to Part (a) for the solution).
Compute the operating cash flow:
Operating cash flow | |
Particulars | Amount |
Earnings before interest and taxes | $2,900 |
Add: Depreciation | $2,900 |
$5,800 | |
Less: Taxes | $884 |
Operating cash flow | $4,916 |
Hence, the operating cash flow is $4,916.
c)
To calculate: The cash flow from assets for 2015 and the possibility of having negative cash flow from assets.
Answer to Problem 20QP
The cash flow from assets is −$84.
Explanation of Solution
Given information:
Company C has sales of $20,300, cost of goods sold of $14,500, depreciation of $2,900, interest expenses of $690, dividend of $660. Opening fixed assets are $15,470, current assets are $4,630, and current liabilities are $2,520.
Closing net fixed assets are $17,120, current assets are $5,345, and current liabilities are $2,785.
The taxes are at the rate of 40%.
Formulae:
The formula to calculate the ending net working capital:
The formula to calculate the beginning net working capital:
The formula to calculate the change in net working capital:
The formula to calculate the cash flow from assets:
Note: The following calculations are required to compute the cash flow from assets.
Compute the ending net working capital:
Hence, the ending net working capital is $2,560.
Compute the beginning net working capital:
Hence, the beginning net working capital is $2,110.
Compute the change in net working capital:
Hence, the change in net working capital is $450.
Compute the net capital spending:
Net capital spending | |
Particulars | Amount |
Ending net fixed assets | $17,120 |
Less: Beginning net fixed assets | $15,470 |
$1,650 | |
Add: Depreciation | $2,900 |
Net capital spending | $4,550 |
Hence, the net capital spending is $4,550.
Compute the cash flow from assets:
The operating cash flow is $ $4,916. (Refer to Part (b) for the solution). The change in net working capital is −$450, the net capital spending is $4,550.
Hence, the cash flow from assets are −$84.
Determine whether the company can have negative cash flow from assets:
The cash flow from assets can be negative. A negative cash flow from assets means that the company borrowed funds to invest in fixed assets. In the given situation, the operating cash flow is positive. However, the cash flow from assets is negative because the company raised additional capital to invest in fixed assets.
d)
To calculate: The cash flow to creditors and the cash flow to stockholders’
Answer to Problem 20QP
Solution:
The cash flow to creditors is $690 and the cash flow to stockholders’ is −$774.
Explanation of Solution
Given information:
Company C had to pay interest expenses of $690 and dividend of $660. There were no debt borrowings in the current year. The cash flow from assets is −$84. (Refer to the above solution).
Formulae:
The formula to calculate the cash flow to creditors:
The formula to calculate the cash flow to stockholders:
Or
Compute the cash flow to creditors:
Hence, the cash flow to creditors is $690.
Compute the cash flow to stockholders:
Hence, the cash flow to stockholders is −$774.
Compute the new equity issued:
Hence, the new equity raised is $1,434.
Final interpretation of the answers in all the parts of the solution:
The operating cash flow and the net income of the company for the year 2015 is positive. The company had to invest $450 in working capital. It also invested $4,550 for buying new fixed assets. To meet the investment needs, the company raised $1,434 in new equity and $84 from its shareholders. It paid $660 as dividends, and $690 as interest. After paying dividends and interest, the company had $84 to meet the investment needs.
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Chapter 2 Solutions
Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
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