Question

# 6. The 2017 balance sheet of Kerber's Tennis Shop, Inc., showed long-term debt of \$6 million,...

6. The 2017 balance sheet of Kerber's Tennis Shop, Inc., showed long-term debt of \$6 million, and the 2018 balance sheet showed long-term debt of \$6.2 million. The 2018 income statement showed an interest expense of \$205,000. During 2018, the company had a cash flow to creditors of \$5,000 and the cash flow to stockholders for the year was \$60,000. Suppose you also know that the firm’s net capital spending for 2018 was \$1,450,000, and that the firm reduced its net working capital investment by \$85,000. What was the firm’s 2018 operating cash flow, or OCF? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567.)

Cash Flow from assets

Cash Flow from assets = Cash Flow to Creditors + Cash Flow to Stockholders

= \$5,000 + \$60,000

= \$65,000

Operating Cash Flow

Operating Cash Flow using the Cash Flow from assets Equation

We know, Cash flow from assets = Operating Cash flows – Change in Net Working capital – Net Capital Spending

\$65,000 = Operating cash flow – (-\$85,000) - \$1,450,000

Operating cash flow = \$65,000 - \$85,000 + \$1,450,000

Operating cash flow = \$1,430,000

“Hence, the firm’s 2018 operating cash flow, or OCF will be \$1,430,000”