Question

During 2018, Raines Umbrella Corp. had sales of $810,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $580,000, $90,000, and $135,000, respectively. In addition, the company had an interest expense of $91,000 and a tax rate of 21 percent. (Ignore any tax loss carryforward provisions and assume interest expense is fully deductible.) Suppose the company paid out $55,000 in cash dividends. If net capital spending and net working capital was zero, and if no new stock was issued during the year, what is the net new long-term debt

Answer 1

$6,000

Step-by-step explanation:

The computation of the net new long term debt is as follows:

But before that following calculations to be done:

Sales $810,000

Less: COGS ($580,000)

Less: S&A Expenses ($90,000)

Less: Depreciation ($135,000)

EBIT $5,000

Less: Interest ($91,000)

Taxable Income ($86,000)

Less: Taxes(21%) $0

Net Income(loss) ($86,000)

Now

OCF = EBIT + Depreciation - Taxes

= $5,000 + $135,000 - $0

= $140,000

Change in NWC = Net capital spending = Net new equity = 0

Cash flow from assets = OCF - Change in NWC - Net capital spending

= $140,000 - $0 - $0

= $140,000

Cash flow to stockholders = Dividends - Net New Equity

= $55,000 - $0

= $55,000

Cash flow to creditors = Cash flow from assets - Cash flow to stockholders

= $140,000 - $55,000

= $85,000

Cash flow to creditors = Interest - Net new LTD

$85,000 = $91,000 - Net new LTD

So,

Net new LTD is

= $91,000 - $85,000

= $6,000