Chap2First

Chap2First - Homework Manager - Corporate Finance FIN301-004

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Question 1: Score 0.5/1 Your response Correct response Calculating Total Cash Flows Greene Co. shows the following information on its 2008 income statement: sales = $146,200; costs = $88,000; other expenses = $5,200; depreciation expense = $6,000; interest expense = $16,000; taxes = $12,090; dividends = $9,077. In addition, you're told that the firm issued $6,300 in new equity during 2008, and redeemed $6,300 in outstanding long-term debt. (Omit the "$" sign in your response.) a. The 2008 operating cash flow is $ 40910 (25%). b. The 2008 cash flow to creditors is $ 9700 (0%). c. The 2008 cash flow to stockholders is $ 2777 (25%). d. If net fixed assets increased by $5,500 during the year, the addition to NWC is $ 800 (0%). Calculating Total Cash Flows Greene Co. shows the following information on its 2008 income statement: sales = $146,200; costs other expenses = $5,200; depreciation expense = $6,000; interest expense = $16,000; taxes = $12,090 = $9,077. In addition, you're told that the firm issued $6,300 in new equity during 2008, and redeemed outstanding long-term debt. (Omit the "$" sign in your response.) a. The 2008 operating cash flow is $ 40910 . b. The 2008 cash flow to creditors is $ 22,300 . c. The 2008 cash flow to stockholders is $ 2777 . d. If net fixed assets increased by $5,500 during the year, the addition to NWC is $ 4,333 . Total grade: 1.0×1/4 + 0.0×1/4 + 1.0×1/4 + 0.0×1/4 = 25% + 0% + 25% + 0% Feedback: a. To calculate the OCF, we first need to construct an income statement. The income statement starts with revenues and subtracts costs to arrive at EBIT. We then subtract out interest to get taxable income, and then subtract taxes to arrive at net income. Doing so, we get: Income Statement Sales $ 146,200 Costs 88,000 Other Expenses 5,200 Depreciation 6,000 EBIT $ 47,000 Interest 16,000 Taxable income $ 31,000 Taxes 12,090 Net income $1 8 , 9 1 0 Dividends $ 9,077 Addition to retained earnings 9,833 Dividends paid plus addition to retained earnings must equal net income, so: Net income = Dividends + Addition to retained earnings Addition to retained earnings = $18,910 – 9,077 Addition to retained earnings = $9,833 So, the operating cash flow is: OCF = EBIT + Depreciation – Taxes OCF = $47,000 + 6,000 – 12,090 OCF = $40,910 b. The cash flow to creditors is the interest paid, minus any new borrowing. Since the company redeemed long-term debt, the new borrowing is negative. So, the cash flow to creditors is: Cash flow to creditors = Interest paid – Net new borrowing Cash flow to creditors = $16,000 – (–$6,300) Cash flow to creditors = $22,300 c. The cash flow to stockholders is the dividends paid minus any new equity. So, the cash flow to stockholders is: Cash flow to stockholders = Dividends paid – Net new equity Cash flow to stockholders = $9,077 – 6,300 Cash flow to stockholders = $2,777 d. In this case, to find the addition to NWC, we need to find the cash flow from assets. We can then use the cash flow from assets equation to find the change in NWC. We know that cash flow from assets is equal to cash flow to creditors plus cash flow to stockholders. So, cash flow from assets is:
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This note was uploaded on 10/10/2010 for the course FIN 301 taught by Professor Andelin,stevenle during the Spring '07 term at Penn State.

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Chap2First - Homework Manager - Corporate Finance FIN301-004

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