RWJ2

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SOLUTIONS B-10We also know that cash flow from assets is equal to the oper a ting cash flow minus the change in networking capital and the net capital spending. We can use this relationship to find the operating cashflow. Doing so, we find:Cash flow from assets = OCF – Change in NWC – Net capital spending–$341,000 = OCF – (– $135,000) – (760,000)OCF = –$341,000 – 135,000 + 760,000OCF = $284,000 Intermediate 14. a. To calculate the OCF, we first need to construct an income statement. The inco me statementstarts with revenues and subtracts costs to arrive at EBIT. We then subtract out interest to gettaxable income, and then subtract taxes to arrive at net income. Doing so, we get:Income StatementSales $138,000Costs 71,500Other Expenses 4,100Depreciation 10,100EBIT $52,300Interest 7,900Taxable income $44,400Taxes 17,760Net income $26,640Dividends $5,400Addition to retained earnings 21,240 D ividends paid plus addition to retained earnings must equal net income, so:Net income = Dividends + Addition to retained earningsAddition to retained earnings = $26,640 – 5,400Addition to retained earnings = $21,240 So, the operating cash flow is:OCF = EBIT + Depreciation – TaxesOCF = $52,300 + 10,100 – 17,760OCF = $44,640 b. The cash flow to creditors is the interest paid, minus any new borrowing. Since the companyredeemed long-term debt, the new borrowing is negative. So, the cash flow to creditors is:Cash flow to creditors = Interest paid – Net new borrowingCash flow to creditors = $7,900 – (–$3,800)Cash flow to creditors = $11,700 CHAPTER 2 B-11 c. The cash flow to stockholders is the dividends paid minus any new equity. So, the cas h flow to s tockholders is:Cash flow to stockholders = Dividends paid – Net new equityCash flow to stockholders = $5,400 – 2,500Cash 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 thenuse the cash flow from assets equation to find the change in NWC. We know that
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cash flow fromassets is equal to cash flow to creditors plus cash flow to stockholders. So, cash flow from assetsis: Cash flow from assets = Cash flow to creditors + Cash flow to stockholdersCash flow from assets = $11,700 + 2,900Cash flow fr om assets = $14,600Net capital spending is equal to depreciation plus the increase in fixed assets, so:Net capital spending = Depreciation + Increase in fixed assetsNet capital spending = $10,100 + 17,400Net capital spending = $27,500Now we can use the cash flow from assets equation to find the
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RWJ2 - SOLUTIONS B-10We also know that cash flow from...

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