5.
Explanation:
To find the OCF, we first calculate net income.
Income Statement
Sales
$126,600
Costs
87,000
Other expenses
4,600
Depreciation
7,000
EBIT
$28,000
Interest
16,000
Taxable income
$12,000
Taxes (33%)
3,960
Net income
$8,040
Dividends
$3,457
Additions to RE
$4,583
a.
OCF = EBIT + Depreciation – Taxes = $28,000 + 7,000 – 3,960 = $31,040
b.
CFC = Interest – Net new LTD = $16,000 – (–6,100) = $22,100
c.
CFS = Dividends – Net new equity = $3,457 – 6,300 = $-2,843
d.
We know that CFA = CFC + CFS, so:
CFA = $22,100 + -2,843 = $19,257
CFA is also equal to OCF – Net capital spending – Change in NWC. We already know OCF.
Net capital spending is equal to:
Net capital spending = Increase in NFA + Depreciation = $4,700 + 7,000 = $11,700
Now we can use:
CFA = OCF – Net capital spending – Change in NWC
$19,257 = $31,040 – 11,700 – Change in NWC
Solving for the change in NWC gives $83, meaning the company increased its NWC by $83.
6.