Math (midterm)

21. (LO2)

a.

		Statement of Comprehensive Income
		Sales	$22,800
		Cost of goods sold	16,050
		Depreciation	4,050
		EBIT	$ 2,700
		Interest	1,830
		Taxable income	$ 870
		Taxes (34%)	295.80
		Net income	$ 574.20

b. OCF = EBIT + Depreciation – Taxes

= $2,700 + 4,050 – 295.80 = $6,454.20

c. Change in NWC = NWCend – NWCbeg

= (CAend – CLend) – (CAbeg – CLbeg)

= ($5,930 – 3,150) – ($4,800 – 2,700)

= $2,780 – 2,100 = $680

Net capital spending = NFAend – NFAbeg + Depreciation

= $16,800 – 13,650 + 4,050 = $7,200

CFA = OCF – Change in NWC – Net capital spending

= $6,454.20 – 680 – 7,200 = –$1,425.80

The cash flow from assets can be positive or negative, since it represents whether the firm raised funds or distributed funds on a net basis. In this problem, even though net income and OCF are positive, the firm invested heavily in both fixed assets and net working capital; it had to raise a net $1,425.80 in funds from its shareholders and creditors to make these investments.

d. Cash flow to creditors = Interest – Net new LTD = $1,830 – 0 = $1,830

Cash flow to shareholders = Cash flow from assets – Cash flow to creditors

= -$1,425.80 – 1,830 = –$ 3,255.80

We can also calculate the cash flow to shareholders as:

Cash flow to shareholders = Dividends – Net new equity

Solving for net new equity, we get:

Net new equity = $1,300 – (–3,255.80) = $4,555.8

The firm had positive earnings in an accounting sense (NI > 0) and had positive cash flow from operations. The firm invested $680 in new net working capital and $7,200 in new fixed assets. The firm had to raise $1,425.80 from its stakeholders to support this new investment. It accomplished this by raising $4,555.8 in the form of new equity. After paying out $1,300 of this in the form of dividends to shareholders and $1,830 in the form of interest to creditors, $1,425.80 was left to meet the firm’s cash flow needs for investment.