Question

Square Hammer Corp. shows the following information on its 2018 income statement: Sales = $305,000; Costs = $176,000; Other expenses = $8,900; Depreciation expense = $18,700; Interest expense $12,900; Taxes - $23,345; Dividends $19,500. In addition, you're told that the firm issued $6,400 in new equity during 2018 and redeemed $4,900 in outstanding long-term debt.
a. What is the 2018 operating cash flow? (Do not round intermediate calculations.)
b. What is the 2018 cash flow to creditors? (Do not round intermediate calculations.)
c. What is the 2018 cash flow to stockholders? (Do not round intermediate calculations.)
d. If net fixed assets increased by $46,000 during the year, what was the addition to NWC? (Do not round intermediate calculations.)

Answer 1

Answer and Explanation:

a. The cash flow to stockholders is

EBIDT - Taxes = Sales - Costs- Other expenses - Taxes

$305,000 - $176,000 - $8,900 - $23,345

= $96,755

b. Cash flow to creditors is

= Interest paid - Net new borrowing

= $12,900 - (-$4,900)

= $17,800

c. Cash flow to stockholders = Dividend paid - Net new equity raised

= $19,500 - $6,400

= $13,100

d. The addition to NWC is

Cash flow from assets = Operating cash flow - Change in NWC - Net capital spending

As we know that

Cash flow from assets is

= Cash flow to creditors + Cash flow to stockholders

= $17,800 + $13,100 = $30,900

Operating cash flow = $96,755

Net Capital Spending = Dep + increase in Fixed assets

= $18,700 + $46,000

= $64,700

Now placing these values to the above formula

$30,900 = $96,755 - Change in NWC - $64,700

Change in NWC is

= $96,755 - $64,700 - $30,900

= $1,155

We simply applied the above formulas