Calculating Cash Flows [LO4] Consider the following abbreviated financial statements for Parrothead Enterprises:
a. What is owners’ equity for 2014 and 2015?
b. What is the change in net working capital for 2015?
c. In 2015, Parrothead Enterprises purchased $2,080 in new fixed assets. How much in fixed assets did Parrothead Enterprises sell? What is the cash flow from assets for the year? (The tax rate is 35 percent.)
d. During 2015, Parrothead Enterprises raised $420 in new long-term debt. How much long-term debt must Parrothead Enterprises have paid off during the year? What is the cash flow to creditors?
a)
To calculate: The shareholders’ equity for 2015 and 2014.
Introduction:
Cash flow refers to the difference between the cash that comes into the business and the cash that goes out of the business. The following are the different types of cash flows in a corporation:
- Cash flow from assets:
It refers to difference between the revenues from the sale of assets and the money invested in purchasing the assets.
- Cash flow to creditors:
It refers to the interest paid to the creditors minus the net fresh debt borrowed by the company.
- Cash flow to stockholders:
It refers to the dividend paid to the shareholders of the company minus the fresh equity raised by the company.
- Operating cash flow:
It refers to the cash flow from operating activities of the firm.
Answer to Problem 22QP
The stockholders’ equity for 2014 is $2,557. The stockholders’ equity for 2015 is $3,299.
Explanation of Solution
Given information:
The current assets are $1,005, the net fixed assets are $4,144, the current liabilities are $402, and the long-term debt is $2,190 for the year 2014. The current assets are $1,089, the net fixed assets are $4,990, the current liabilities are $451, and the long-term debt is $2,329 for the year 2015.
Formulae:
Compute the total assets for 2014:
Hence, the total assets for 2014 is $5,149.
Compute the total liabilities for 2014:
Hence, the total liabilities for 2014 is $2,592.
Compute the stockholders’ equity for 2014:
Hence, the stockholders’ equity for 2014 is $2,557.
Compute the total assets for 2015:
Hence, the total assets for 2015 is $6,079.
Compute the total liabilities for 2015:
Hence, the total liabilities for 2015 is $2,780.
Compute the stockholders’ equity for 2015:
Hence, the stockholders’ equity for 2015 is $3,299.
b)
To calculate: The change in net working capital for 2015.
Answer to Problem 22QP
The change in net working capital for 2015 is $35.
Explanation of Solution
Given information:
The current assets are $1,005, and the current liabilities are $402 for the year 2014. The current assets are $1,089, and the current liabilities are $451 for the year 2015.
Formulae:
Compute the ending net working capital:
Hence, the ending net working capital is $638.
Compute the beginning net working capital:
Hence, the beginning net working capital is $603.
Compute the change in net working capital:
Hence, the change in net working capital is $35.
c)
To calculate: The cash flow from assets for 2015, and the fixed assets sold in 2015.
Answer to Problem 22QP
The cash flow from assets is $2,917. The company sold $98 worth of fixed assets.
Explanation of Solution
Given information:
The company had sales of $12,751. The costs of goods sold were $5,946. The company charged $1,136 as depreciation. It had to pay interest expenses amounting to $323. The tax rate applicable is 35 percent. The change in net working capital is $35. The net fixed assets are $4,144 for the year 2014, and the net fixed assets are $4,990 for the year 2015. The company purchased $2,080 worth of fixed assets.
Formulae:
Compute the net income:
Company P | ||
Income statement | ||
Particulars | Amount | Amount |
Net sales | $12,751 | |
Less: | ||
Costs | $5,946 | |
Depreciation | $1,136 | $7,082 |
Earnings before interest and taxes | $5,669 | |
Less: Interest paid | $323 | |
Taxable income | $5,346 | |
Less: Taxes ($5,346×35%) | $1,871 | |
Net income | $3,475 |
Hence, the net income is $3,475.
Compute the operating cash flow:
Company Q | |
Operating cash flow | |
Particulars | Amount |
Earnings before interest and taxes | $5,669 |
Add: Depreciation | $1,136 |
$6,805 | |
Less: Taxes | $1,871 |
Operating cash flow | $4,934 |
Hence, the operating cash flow is $4,934.
Compute the net capital spending:
Company Q | |
Net capital spending | |
Particulars | Amount |
Ending net fixed assets | $4,990 |
Less: Beginning net fixed assets | $4,144 |
$846 | |
Add: Depreciation | $1,136 |
Net capital spending | $1,982 |
Hence, the net capital spending is $1,982.
Compute the cash flow from assets:
The operating cash flow is $4,934. The change in net working capital is $35, and the net capital spending is $1,982.
Hence, the cash flow from assets is $2,917.
Compute the fixed assets sold:
Hence, the value of fixed assets sold is $98.
d)
To calculate: The cash flow to creditors and the amount of long-term debt paid off.
Answer to Problem 22QP
The cash flow to creditors is $184. The company paid off $281 worth of long-term debt.
Explanation of Solution
Given information:
The long-term debt is $2,190 for the year 2014, and the long-term debt is $2,329 for the year 2015. The raised $420 in new long-term debt. The company paid interest amounting to $323.
Formulae:
Compute the net new borrowing:
Hence, the net new borrowing is $139.
Compute the cash flow to creditors:
Hence, the cash flow to creditors is $184.
Compute the debt paid off:
Hence, the value of debt paid off is $281.
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Chapter 2 Solutions
Fundamentals of Corporate Finance
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