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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

Q
uestions

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.