Chapter 2, Problem 25QP

Summary Introduction

To compute: The cash flow to creditors, cash flow to stock holders and cash flow from assets.

Explanation of Solution

The computation of cash flow from asset is as follows:

$\begin{array}{l}\text{OCF = EBIT + Depreciation – Taxes}\hfill \\ =\$18,731+5,858–5,456.15\hfill \\ =\$19,132.85\hfill \end{array}$

$\begin{array}{l}{\text{Change in NWC = NWC}}_{\text{end}}{\text{– NWC}}_{\text{beg}}={\left(\text{CA – CL}\right)}_{\text{end}}\text{– }{\left(\text{CA – CL}\right)}_{\text{beg}}\hfill \\ \text{ = }\left(\$105,395–25,639\right)–\left(\$99,934–27,349\right)\hfill \\ =\$7,171\hfill \\ \hfill \end{array}$

$\begin{array}{l}{\text{Net capital spending = NFA}}_{\text{end}}{\text{– NFA}}_{\text{beg}}\text{+ Depreciation}\hfill \\ =\$183,440–179,166+5,858\hfill \\ =\$10,132\hfill \\ \hfill \end{array}$

$\begin{array}{l}\text{Cash flow from assets = OCF – Change in NWC – Net capital spending}\hfill \\ =\$19,132.85–7,171–10,132\hfill \\ =\$1,829.85\hfill \\ \hfill \end{array}$

Hence, the cash flow from asset is $1,829.85.

The computation of cash flow to creditors is as follows:

$\begin{array}{l}\text{Cash flow to creditors = Interest – Net new LTD}\hfill \\ {\text{ Net new LTD = LTD}}_{\text{end}}{\text{– LTD}}_{\text{beg}}\hfill \\ =\$3,142–\left(\$83,476–71,550\right)\hfill \\ =–\$8,784\hfill \end{array}$

Hence, the cash flow to creditors is -$8784.

The computation of cash flow to stock holders is as follows:

$\begin{array}{l}\text{Cash flow to stockholders = Dividends – Net new equity}\hfill \\ =\$5,468–\left(–\$5,145.85\right)\hfill \\ =\$10,613.85\hfill \\ \hfill \end{array}$

Hence, the cash flow to stock holders is $10,613.85.