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Homework answers / question archive / Sales 153,000 Costs 81,900 Other Expenses 5,200 Depreciation 10,900 Interest Expense 8,400 Taxes 16,330 Dividends 7,200 New Equity 2,600 Redeemed LT Debt 3,900 1) If net fixed assets increased by $20,250 during the year, what was the addition to NWC?
Sales 153,000
Costs 81,900
Other Expenses 5,200
Depreciation 10,900
Interest Expense 8,400
Taxes 16,330
Dividends 7,200
New Equity 2,600
Redeemed LT Debt 3,900
1) If net fixed assets increased by $20,250 during the year, what was the addition to NWC?
In this case, to find the addition to NWC, we need to find the cash flow from assets. We can then use the cash flow from assets equation to find the change in NWC. We know that cash flow from assets is equal to cash flow to creditors plus cash flow to stockholders. So, cash flow from assets is:
Cash flow from assets = Cash flow to creditors + Cash flow to stockholders
Cash flow from assets = $12,300 + 4,600
Cash flow from assets = $16,900
Net capital spending is equal to depreciation plus the increase in fixed assets, so:
Net capital spending = Depreciation + Increase in fixed assets
Net capital spending = $10,900 + 20,250
Net capital spending = $31,150
Now we can use the cash flow from assets equation to find the change in NWC. Doing so, we find:
Cash flow from assets = OCF - Change in NWC - Net capital spending
$16,900 = $49,570 - Change in NWC - $31,150
Change/Addition in NWC = $1,520
Step-by-step explanation
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To calculate the OCF, we first need to construct an income statement. The income statement starts with revenues and subtracts costs to arrive at EBIT. We then subtract out interest to get taxable income, and then subtract taxes to arrive at net income. Doing so, we get:
Income Statement: Sales $153,000 Costs 81,900 Other Expenses 5,200 Depreciation 10,900 EBIT $55,000 Interest 8,400 Taxable income $46,600 Taxes 16,330 Net income $30,270
Dividends $7,200 Addition to retained earnings 23,070
Dividends paid plus addition to retained earnings must equal net income, so:
Net income = Dividends + Addition to retained earnings Addition to retained earnings = $30,270 - 7,200 Addition to retained earnings = $23,070
So, the operating cash flow is:
OCF = EBIT + Depreciation - Taxes OCF = $55,000 + 10,900 - 16,330 OCF = $49,570 |
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The cash flow to creditors is the interest paid, minus any new borrowing. Since the company redeemed long-term debt, the net new borrowing is negative. So, the cash flow to creditors is: Cash flow to creditors = Interest paid - Net new borrowing Cash flow to creditors = $8,400 - (-$3,900) Cash flow to creditors = $12,300 |
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The cash flow to stockholders is the dividends paid minus any new equity. So, the cash flow to stockholders is: Cash flow to stockholders = Dividends paid - Net new equity Cash flow to stockholders = $7,200 - 2,600 Cash flow to stockholders = $4,600 |
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In this case, to find the addition to NWC, we need to find the cash flow from assets. We can then use the cash flow from assets equation to find the change in NWC. We know that cash flow from assets is equal to cash flow to creditors plus cash flow to stockholders. So, cash flow from assets is: Cash flow from assets = Cash flow to creditors + Cash flow to stockholders Cash flow from assets = $12,300 + 4,600 Cash flow from assets = $16,900
Net capital spending is equal to depreciation plus the increase in fixed assets, so:
Net capital spending = Depreciation + Increase in fixed assets Net capital spending = $10,900 + 20,250 Net capital spending = $31,150
Now we can use the cash flow from assets equation to find the change in NWC. Doing so, we find:
Cash flow from assets = OCF - Change in NWC - Net capital spending $16,900 = $49,570 - Change in NWC - $31,150 Change/Addition in NWC = $1,520 |
