Question

During the year, Belyk Paving Co. had sales of $2,425,000. Cost of goods sold, administrative and selling expenses, and depreciation expense were $1,335,000, $635,000, and $450,000, respectively. In addition, the company had an interest expense of $275,000 and a tax rate of 25%. (Ignore any tax loss or carryforward provision and assume interest expense is fully deductible). Calculate the firm's net new long-term debt added during the year.

Answer 1

See below

Step-by-step explanation:

Sales

$2,425,000

Less:

Cost of goods sold

($1,335,000)

Administration and selling expense

($635,000)

Depreciation

($450,000)

EBIT

$5,000

Less:

Interest

($275,000)

No tax

Net income/loss

-$270,000

Operating cash flow = $5,000 + $450,000 - $0 = $500,000

Cash flow from assets = Operating cash flow - Change in networking capital - Net capital spending

= $500,000 - $0 - $0

= $500,000

Cash flow to shareholders = Dividends - New equity

= $0 - $0

= $0

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

= $500,000 - $0

= $500,000

Therefore, new long term debt added during the year is;

= Interest - Cash flow to creditors

= $275,000 - $500,000

= $225,000