Question

Raymond had sales of $739,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $576,000, $105,000, and $133,000, respectively. In addition, Raymond had an interest expense of $95,000 and a tax rate of 40 percent. (Ignore any tax loss carryback or carryforward provisions.) Assume Raymond paid out $16,000 in cash dividends. If spending on net fixed assets and net working capital was zero, and if no new stock was issued during the year, what is the firm's net new long-term debt?

Answer 1

A company gets finance to run its operations either from issuing stock or debt or using its assets so when a company is not spent any amount on net fixed assets and net working capital and also no new stock is issued then entire cash expenditure that was spent is from the total long-term debt.

Therefore, the long-term debt is equal to the total cash expenditure that was incurred assuming that it taken the debt equal to the amount required to spent for cash operating expenses of $681,000 ($576,000 + $105,000). Depreciation expense is not considered because it is a non cash expenditure.

Therefore, the firm's long-term debt is $681,000.