Question

During 2018, Raines Umbrella Corp. had sales of $740,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $576,000, $91,000, and $134,000, respectively. In addition, the company had an interest expense of $96,000 and a tax rate of 35 percent. (Ignore any tax loss carryback or carryforward provisions.) Assume Raines Umbrella Corp. paid out $20,000 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

EBIT = Sales - Costs - A&S Expenses - Depreciation

= $740,000 - $576,000 - $91,000 - $134,000 = -$61,000

As their is no carryforward provision, so, Net Income is $0.

OCF = Net Income + Depreciation

= $0 + $134,000 = $134,000

CFFA = OCF - NFA - Addition to NWC = $134,000 - $0 - $0 = $134,000

Cash flow to shareholders = Dividends paid - Net new equity

= $20,000 - $0 = $20,000

Cash Flow from Assets = Cash Flow to shareholders + Cash Flow to creditors

$134,000 = $20,000 + Cash Flow to creditors

Cash Flow to creditors = $134,000 - $20,000 = $114,000

Cash Flow to creditors = Interest Paid - Net new borrowings

$114,000 = $96,000 - Net new borrowings

Net new borrowings = $96,000 - $114,000 = -$18,000