Question

Square Hammer Corp. shows the following information on its 2018 income statement:

Sales = $305,000
Costs = $176,000
Other expenses = $8,900
Depreciation expense = $18,700
Interest expense = $12,900
Taxes = $23,345
Dividends = $19,500.

In addition, you’re told that the firm issued $6,400 in new equity during 2018 and redeemed $4,900 in outstanding long-term debt.

Required:
a. What is the 2018 net income?
b. What is the 2018 operating cash flow?
c. What is the 2018 cash flow to creditors?
d. What is the 2018 cash flow to stockholders?
e. If net fixed assets increased by $46,000 during the year, what was the addition to NWC?

Answer 1

Answer and Explanation:

The computations are shown below:

a) The net income is

= Sales - cost - other expenses - depreciation expenses - interest expense - taxes

= $305,000 - $176,000 - $8,900 - $18,700 - $12,900 - $23,345

= $65,155

b) For Operating Cash flow

= EBIDT - taxes

= Sales - costs - other exp - taxes

= $305,000 - $176,000 - $8,900 - $23,345

= $96,755

c) Cash flow to creditors is

= interest paid - net new borrowing

= $12,900 - (- $4,900)

= $17,800

d) Cash flow to stockholders is

= dividend paid - net new equity raised

= $19,500 - $6,400

= $13,100

e)If net fixed assets increased by $46000 during the year, the addition to Net working capital is

As we know that

Cash flow from assets = Operating cash flow - Change in NWC - Net capital spending ............... (equation 1)

Cash flow from assets

= Cash flow to creditors + Cash flow to stockholders

= $17,800 + $13,100

= $30,900

And, the operating cash flow = $96,755

Net Capital Spending is

= Dep + increase in FA

= $18,700 + $46,000

= 64700

Placing the values in Equation (1), we get

$30,900 = $96,755 - Change in NWC - $64,700

Change in NWC is

= $96,755 - $64,700 - $30,900

= $1,155