During 2018, Raines Umbrella Corp. had sales of $705,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $445,000, $95,000, and $140,000, respectively. In addition, the company had an interest expense of $70,000 and a tax rate of 25 percent. (Ignore any tax loss carryforward provisions and assume interest expense is fully deductible.) Suppose Raines Umbrella Corp. paid out $102,000 in cash dividends. Is this possible? 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 net new long-term debt? (Do not round intermediate calculations.)
Sales | 705000 |
Less: cost of goods sold | 445000 |
Less: Admin and selling expenses | 95000 |
Less: Depreciation | 140000 |
EBIT | 25000 |
Less: Interest | 70000 |
EBT | (-)45000 |
Less: Tax@25% | 0 |
Net income | (-)45000 |
Operating cash flow = EBIT + Depreciation = 25000 + 140000 = 165000
It is possible to distribute Cash dividends of $102000 from these cash flows.
Cash flow from assets = Operating cash flow - net working capital changes - capital spending = 165000 - 0 - 0 = 165000
Cash flow to stockholders = Dividends paid = 102000
Cash flow to creditors = Cash flow from assets - Cash flow to stockholders = 165000 - 102000 = 63000
New Long term debt = Interest - Cash flow to creditors = 70000 - 63000 = 7000
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