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During 2009, Raines Umbrella Corp. had sales of $732,000. Cost of goods sold, administrative and selling...

During 2009, Raines Umbrella Corp. had sales of $732,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $562,000, $97,000, and $131,000, respectively. In addition, the company had an interest expense of $101,000 and a tax rate of 40 percent. (Ignore any tax loss carryback or carryforward provisions.) Assume Raines Umbrella Corp. 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?

  • $89,000

  • $44,000

  • $18,500

  • $73,450

  • $0
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Answer #1

EBIT is calculated as: Sales-Cost of goods sold-administrative and selling expenses-depreciation expenses.

So, EBIT= 732000-562000-97000-131000= -$58000.

Operating Cashflow (OCF) can be calculated as: EBIT-Taxes+Depreciation. As the Taxable income is negative, the taxes will be zero.

So, OCF= -58000-0+131000= $73000.

Cashflow from Assets is calculated as: OCF-Change in NWC-Net Capital Spending= 73000-0-0= $73000.

Cashflow to Creditors= Cashflow from Assets-Dividends= 73000-16000= $57000.

Cashflow to Creditors is also equal to Interest expense-Net new long term debt.

So, 101000-Net new long term debt= 57000

Net new long term debt= $44000. (Option b).

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