#3:
Dahlia Industries had the following operating results for 2009:
sales = $22,800;
cost of goods sold = $16,050;
depreciation expense = $4,050;
interest expense = $1,830;
dividends paid = $1,300.
At the beginning of the year, net fixed assets were $13,650, current assets
were $4,800, and current liabilities were $2,700.
At the end of the year, net fixed asset $16,800, current assets were $5,930,
and current liabilities were $3,150. The tax rate for 2009 was 34 percent.
a. What is net income for 2009?
b. What is the operating cash flow for 2009?
c. What is the cash flow from assets for 2009? Is this possible? Explain.
d. If no new debt was issued during the year, what is the cash flow to
creditors? What is the cash flow to stockholders? Explain and interpret
the positive and negative signs of your answers in (a) through (d). 4
#3:
a. What is net income for 2009?
Income Statement
Sales $22,800
Cost of goods sold (16,050)
Depreciation (4,050)
EBIT $ 2,700
Interest (1,830)
Taxable income $ 870
Taxes (34%) (296)
Net income $ 574
b. What is the operating cash flow for 2009?
OCF = EBIT + Depreciation – (EBIT*tax rate)
= $2700 + $4,050 – $918 = $5,832
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c. What is the cash flow from assets for 2009? Is this possible?
Explain.
CFFA* = OCF – Change in NOWC – Net capital spending
NOWC = Current assets – Non-interest bearing Current liabilities
Change in NOWC = NOWCend – NOWCbeg
= (CAend – CLend) – (CAbeg – CLbeg)
= ($5,930 – 3,150) – ($4,800 – 2,700)
= $2,780 – 2,100 = $680;
assuming that the current liabilities are non-interest bearing
Net capital spending = net FAend – net FAbeg + Depreciation
= $16,800 – 13,650 + 4,050 = $7,200
CFFA* = OCF – Change in NOWC – Net capital spending
= $5,832 – 680 – 7,200 = –$2,048 (is this possible?)
CFFA* is negative because the firm invested heavily in both fixed
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assets and net working capital resulting in negative CFFA
d. If no new debt was issued during the year, what is the cash flow to
creditors? What is the cash flow to stockholders? Explain and
interpret the positive and negative signs of your answers in (a) through
(d).
Cash flow to creditors = Interest – Net new borrowing (LT-Debt and
Notes Payable)
= $1,830 – 0 = $1,830
Cash flow to stockholders = Dividends – Net new equity raised
= 1,300 – Net new equity raised
As per your recommended textbook,
CFFA = OCF −Change in NWC − Net capital spending
CFFA = Cash flow to stockholders + Cash flow to creditors
CFFA* = CFFA −interest tax shield
-$2,048 = + $1,830 + ($1,300– Net new equity raised) – $1,830(0.34)
New equity raised = $4,555.80
The cash flow to stockholders = $1,300 - $4,555.80 = -$3255.8
7
The firm had positive earnings in an accounting sense (NI > 0) and had
positive cash flow from operations.
The firm invested $680 in new net working capital and $7,200 in new
fixed assets. The firm had to raise funds from its stakeholders to support
this new investment.
In this problem, even though net income and OCF are positive, the firm
invested heavily in both fixed assets and net working capital resulting
in negative CFFA; it had to raise funds from its stockholders and
creditors to make these investments. Given in the question (d), no new
debt was raised during the year, the firm accomplished this by raising
$4,555.80 in the form of new equity.
After paying out $1,300 of this in the form of dividends to shareholders
and $1,830 in the form of interest to creditors, $1,425.80 was left to
meet the firm’s cash flow needs for investment.
