Question

The 2008 balance sheet of Maria's Tennis Shop, Inc., showed $2.85 million in long-term debt, $740,000 in the common stock account, and $6.45 million in the additional paid-in surplus account. The 2009 balance sheet showed $3.65 million, $905,000, and $8.15 million in the same three accounts, respectively. The 2009 income statement showed an interest expense of $230,000. The company paid out $580,000 in cash dividends during 2009. If the firm's net capital spending for 2009 was $840,000, and the firm reduced its net working capital investment by $195,000, the firm's 2009 operating cash flow, or OCF?

Answer 1

Solution :- Cash flow to creditors = Interest paid - Net new borrowings.

= 230000 - (3650000 - 2850000)

= 230000 - 800000

= (-) 570000.

Cash flow to Stockholders = Dividend paid - Net new equity.

= 580000 - [ (905000 + 8150000) - (740000 + 6450000) ]

= 580000 - (9055000 - 7190000)

= 580000 - 1865000

= (-) 1285000.

Cash flow from assets = Cash flow to creditors + Cash flow to Stockholders

= (-) 570000 + (-) 1285000

= (-) 1855000.

Cash flow from assets = Operating cash flow (OCF) - Net capital spening - Net working capital.

(-) 1855000 = Operating cash flow (OCF) - 840000 - (-) 195000

(-) 1855000 =  Operating cash flow (OCF) - 840000 + 195000

Operating cash flow (OCF) = (-) 1855000 + 840000 - 195000.

Operating cash flow (OCF) = (-) 1210000.

Conclusion :- Operating cash flow (OCF) of the firm in Year 2009 = (-) 1210000 Dollars.