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During the year, Belyk Paving Co. had sales of $2,600,000. Cost of goods sold, administrative and...

Question:

During the year, Belyk Paving Co. had sales of $2,600,000. Cost of goods sold, administrative and selling expenses, and depreciation expense were $1,535,000, $465,000, and $520,000, respectively. In addition, the company had an interest expense of $245,000 and a tax rate of 35%. Ignore any tax loss carryback or carryforward provisions. Belyk Paving Co. paid out $420,000 in cash dividends. If net capital spending was zero, no new investments were made in net working capital, and no new stock was issued during the year. (Enter your answer as directed, but do not round intermediate calculations.) Calculate the firm's new long-term debt added during the year.

Cash Flow Identity:

The cash flow identity states that the cash flow from assets is equal to the cash flow paid to the providers of capital. In other words, cash flow from assets = cash flow to creditors + cash flow to stockholders

Answer and Explanation:

STEP 1: Calculate cash flow from assets.

  • The income statement will appear as follows:

Sales $ 2,600,000
Less: Cost of goods sold $ (1,535,000)
Gross profit $ 1,065,000.
Less: Expenses:
administrative and selling expenses $ (465,000)
depreciation expense $ (520,000.)
EBIT $ 80,000
Less: Interest Expense $ (245,000)
EBT $ (165,000)
Tax at 35% $ - No Loss Carry back or forward
EAT $ (165,000)
  • Operating cash flow (OCF) = EBIT + depreciation + taxes

165,000 + 520,000 + 0 = $685,000

  • Net cash flow from assets = OCF - change in net working capital - Net capital spending

= 685,000 - 0 - 0

= $685,000

STEP 2: Calculate cash flow to stockholders

Cash flow to stock holders = Dividends paid - Net new equity

= 420,000 -0 (Note: No new stock was issued during the year)

= $420,000

STEP3: Calculate cash flow to creditors

  • Cash flow from assets = cash flow to creditors + cash flow to stockholders

685,000 = cash flow to creditors + 420,000

Cash flow to creditors = $265,000

STEP 4: Calculate new long term debt

  • Cash flow to creditors = Interest paid - New long term debt

265,000 = 245,000 - New long term debt

New long term debt = $20,000


Learn more about this topic:

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What Is Cash Flow? - Definition, Calculation & Example

from Corporate Finance: Help & Review

Chapter 8 / Lesson 14
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