# Jetson Spacecraft Corp. shows the following information on its 2011 income statement: sales =...

## Question:

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 =$72,100

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.