Question

Fairbanks Co.'s balance sheet showed long-term debt of $4.75 million in 2016, and $3.5 million in 2017. In 2016, the balance sheet showed a common stock account of $1.5 million, and 5 million in additional paid-in surplus account. In 2017, the balance sheet showed $1.75 million and 5 million in the same two accounts respectively. In 2017, the income statement showed an interest expense of $750,000 and dividends paid of $900,000. Calculate the cash flow to the stockholders for the year.

Answer 1

Firm's 2019 operating cash flow, or OCF

Cash Flow to Creditors

Cash Flow to Creditors = Interest Expenses Paid – Net Increase in Long term debt

= Interest Expenses Paid – [Long term debt at the end – Long term Debt at the Beginning]

= $165,000 – [$5,250,000 - $5,000,000]

= $165,000 - $250,000

= -$85,000

Cash Flow to Stockholders

Cash Flow to Stockholders = Dividend Paid – Net New Equity

= Dividend Paid – [(Common stock at the end + Additional paid-in surplus account at the end) - (Common stock at the beginning + Additional paid-in surplus account at the beginning)

= $410,000 – [($550,000 + $4,800,000) – ($510,000 + $4,6000,000)]

= $410,000 – [$5,350,000 - $5,110,000]

= $410,000 - $240,000

= $170,000

Cash Flow from assets

Cash Flow from assets = Cash Flow to Creditors + Cash Flow to Stockholders

= -$85,000 + $170,000

= $85,000

Operating Cash Flow

Operating Cash Flow using the Cash Flow from assets Equation

We know, Cash flow from assets = Operating Cash flows – Change in Net Working capital – Net Capital Spending

$85,000 = Operating cash flow – (-$69,000) - $1,370,000

Operating cash flow = $85,000 - $69,000 + $13,70,000

Operating cash flow = $1,386,000

“Therefore, the firm's 2019 operating cash flow, or OCF will be $1,386,000”