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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 longterm 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
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View Full Document 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 longterm 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
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This note was uploaded on 06/13/2011 for the course ECONOMICS 5060 taught by Professor Benard during the Spring '11 term at Rutgers.
 Spring '11
 Benard
 Economics

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