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Rutgers University. Spring 2012

# Rutgers University. Spring 2012 - Chapter 2 Lecture...

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Chapter 2 Lecture Problems 14. Calculating Total Cash Flows. Greene Co. shows the following information on its 2008 income statement: Sales = \$138,000 Costs = \$71,500 Other expenses = \$4,100 Depreciation expense = \$10,100 Interest expense = \$7,900 Taxes = \$17,760 Dividends = \$5,400. In addition, you're told that the firm issued \$2,500 in new equity during 2008, and redeemed \$3,800 in outstanding long-term debt. a. What is the 2008 operating cash flow? b. What is the 2008 cash flow to creditors? c. What is the 2008 cash flow to stockholders? d. If net fixed assets increased by \$17,400 during the year, what was the addition to NWC? 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 \$138,000 Costs 71,500 Other Expenses 4,100 Depreciation 10,100 EBIT \$52,300 Interest 7,900 Taxable income \$44,400 Taxes 17,760 Net income \$26,640 Dividends \$5,400 Addition to retained earnings 21,240 Page 1

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Chapter 2 Lecture Problems Dividends paid plus addition to retained earnings must equal net income, so: Net income = Dividends + Addition to retained earnings Addition to retained earnings = \$26,640 – 5,400 Addition to retained earnings = \$21,240 So, the operating cash flow is: OCF = EBIT + Depreciation – Taxes OCF = \$52,300 + 10,100 – 17,760 OCF = \$44,640 b. The cash flow to creditors is the interest paid, plus 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 = \$7,900 – (–\$3,800) Cash flow to creditors = \$11,700 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 = \$5,400 – 2,500 Cash flow to stockholders = \$2,900 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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