HW2s-s10

# HW2s-s10 - ECN 134 Solution Key to Problem Set Financial...

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ECN 134: Solution Key to Problem Set Financial Economics Prof. Farshid Mojaver Part A Problem 1: Cash Flows at WARF Computers, Inc. Angus has asked you to prepare the financial statement of each flows and the accounting statement of cash flows . He has also asked you to answer the following questions: 1. How would you describe Wart Computer’s cash flows? 2. Which cash flow statement more accurately describes the cash flows at the company? 3. In light of your previous answers, comment on Nick’s expansion plans. Answer) The operating cash flow for the company is: (NOTE: All numbers are in thousands of dollars) OCF = EBIT + Depreciation – Current taxes OCF = \$1,332 + 159 – 386 = \$1,105 To calculate the cash flow from assets, we need to find the capital spending and change in net working capital. The capital spending for the year was: Capital spending Ending net fixed assets \$2,280 – Beginning net fixed assets 1,792 + Depreciation 159 Net capital spending \$ 647 And the change in net working capital was: Change in net working capital Ending NWC \$728 – Beginning NWC 586 Change in NWC \$142 So, the cash flow from assets was: Cash flow from assets Operating cash flow \$1,105 – Net capital spending 647 – Change in NWC 142 Cash flow from assets \$316 The cash flow to creditors was: Cash flow to creditors Interest paid \$95 – Net New Borrowing 20 1

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Cash flow to Creditors \$75 The cash flow to stockholders was: Cash flow to stockholders Dividends paid \$212 – Net new equity raised –29 Cash flow to Stockholders \$241 The accounting cash flow statement of cash flows for the year was: Statement of Cash Flows Operations Net income \$742 Depreciation 159 Deferred taxes 109 Changes in assets and liabilities Accounts receivable (31) Inventories 14 Accounts payable 17 Accrued expenses (99) Other (9) Total cash flow from operations \$902 Investing activities Acquisition of fixed assets \$(786) Sale of fixed assets 139 Total cash flow from investing activities \$(547) Financing activities Retirement of debt \$(98) Proceeds of long-term debt 118 Notes payable 5 Dividends (212) Repurchase of stock (40) Proceeds from new stock issues 11 Total cash flow from financing activities \$(216) Change in cash (on balance sheet) \$39 Answers to questions 1. The firm had positive earnings in an accounting sense (NI > 0) and had positive cash flow from operations and a positive cash flow from assets. The firm invested \$142 in new net working capital and \$647 in new fixed assets. The firm was able to return \$241 to its stockholders and \$75 to creditors. 2
2. The financial cash flows present a more accurate picture of the company since it accurately reflects interest cash flows as a financing decision rather than an operating decision. 3.

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HW2s-s10 - ECN 134 Solution Key to Problem Set Financial...

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