Jetson Spacecraft Corp. shows the following information on its 2011 income statement: sales = $380,000; costs = $300,000; other expenses = $7,900; depreciation expense = $15,000; interest expense = $13,000; taxes = $15,435; dividends = $10,000. In addition, you?re told that the firm issued $4,500 in new equity during 2011 and redeemed $3,000 in outstanding long-term debt.
a. What is the 2011 operating cash flow? Operating cash flow$
b. What is the 2011 cash flow to creditors? Cash flow to creditors$
c. What is the 2011 cash flow to stockholders? Cash flow to stockholders$
d. If net fixed assets increased by $20,000 during the year, what was the addition to NWC? Addition to NWC$
Redemption of Long-term Debt:
Redeeming long-term debt is a gradual relief for the company. Periodical redemption of long-term debt keeps the interest coverage ratio in check and has a positive impact on its overall credit score. Piling up of debt becomes a cause of concern for the company.
Answer and Explanation:
a. OCF = EBIT + Dep - Taxes + Changes in WC
EBIT = Sales - Costs - Other expenses
= $380,000 - $300,000 - $7,900
OCF = $72,100 + $15,000 - $15,435 + $0 = $71,665
NOTE: New equity and outstanding long term debt do not affect OCF as they are balancesheet items.
b. Cash flow to creditors = I - E + B
= $13,000 - $3,000 = $10,000
(Redemption of debt equals the difference between ending long-term debt and beginning long-term debt)
c. Cash flow to stockholders = Dividends paid = $10,000
d. NWC is unaffected by net fixed assets as it is not a current asset.
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from Finance 101: Principles of FinanceChapter 10 / Lesson 4