Help With A Question

 

1. The income statement for each year will look like this:

 

	Income statement
		2018		2019
	Sales	$440,122		$536,483
	Cost of goods sold	224,359		283,281
	Selling & administrative	44,121		57,586
	Depreciation	63,334		71,584
	EBIT	$108,308		$124,032
	Interest	13,783		15,780
	EBT	$94,525		$108,252
	Taxes	19,850		22,733
	Net income	$74,675		$85,519

 

	Dividends	$37,337		$42,760
	Addition to retained earnings	37,337		42,760

 

2. The balance sheet for each year will be:

 

	Balance sheet as of Dec. 31, 2018
	Cash	$32,372			Accounts payable	$57,220
	Accounts receivable	22,939			Notes payable	26,079
	Inventory	48,272			Current liabilities	$83,299
	Current assets	$103,583
					Long-term debt	$141,040
	Net fixed assets	$279,419			Owners’ equity	$158,663
	Total assets	$383,002			Total liab. & equity	$383,002

 
In the first year, equity is not given. Therefore, we must calculate equity as a plug variable. Since total liabilities & equity is equal to total assets, equity can be calculated as:
 
Equity = $383,002 – 83,299 – 141,040   See Balance Sheet
Equity = $158,663

	Balance sheet as of Dec. 31, 2019
	Cash	$34,394			Accounts payable	$63,479
	Accounts receivable	29,755			Notes payable	28,474
	Inventory	66,244			Current liabilities	$91,953
	Current assets	$130,393
					Long-term debt	$158,368
	Net fixed assets	$348,508			Owners’ equity	$228,580
	Total assets	$478,901			Total liab. & equity	$478,901

 
The owners’ equity for 2019 is the beginning of year owners’ equity, plus the addition to retained earnings, plus the new equity, so:
 
Equity = $158,663 + 42,760 + 27,157   See Balance Sheet.
Equity = $228,580
 

3. Using the OCF equation:

 
OCF = EBIT + Depreciation – Taxes
 
The OCF for each year is:
 
OCF₂₀₁₈ = $108,308 + 63,334 – 19,850
OCF₂₀₁₈ = $151,792
 
OCF₂₀₁₉ = $124,032 + 71,584 – 22,733
OCF₂₀₁₉ = $172,883
 

4. To calculate the cash flow from assets, we need to find the capital spending and change in net working capital. The capital spending for the year was:

 

	Capital spending
	Ending net fixed assets	$348,508
	– Beginning net fixed assets	279,419
	+ Depreciation	71,584
	Net capital spending	$140,673

 
And the change in net working capital was:
 

	Change in net working capital
	Ending NWC	$38,440
	– Beginning NWC	20,284
	Change in NWC	$18,156

 
 
So, the cash flow from assets was:
 

	Cash flow from assets
	Operating cash flow	$172,883
	– Net capital spending	140,673
	– Change in NWC	18,156
	Cash flow from assets	$14,054

 

5. The cash flow to creditors was:

 

	Cash flow to creditors
	Interest paid	$15,780
	– Net new borrowing	17,328
	Cash flow to creditors	–$1,548

 

6. The cash flow to stockholders was:

 

	Cash flow to stockholders
	Dividends paid	$42,760
	– Net new equity raised	27,157
	Cash flow to stockholders	$15,603

 
Questions
Type your questions please.

1. The firm had positive earnings in an accounting sense (NI > 0) and had positive cash flow from operations. The firm invested $18,156 in new net working capital and $140,673 in new fixed assets. The firm gave $14,054 to its stakeholders. It raised $1,548 from bondholders and paid $15,603 to stockholders.

 

2. The expansion plans may be a little risky. The company does have a positive cash flow, but a large portion of the operating cash flow is already going to capital spending. The company has had to raise capital from creditors and stockholders for its current operations. So, the expansion plans may be too aggressive at this time. On the other hand, companies do need capital to grow. Before investing or loaning the company money, you would want to know where the current capital spending is going, and why the company is spending so much in this area already.