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: