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"assume a company has sales of $423,800, production costs of $297,400, other expenses of $18,500, depreciation expense of $36,300, interest expense of $2,100, taxes of $23,600, and dividends of $12,000. in addition, you're told that during the year the firm issued $4,500 in new equity and redeemed $6,500 in outstanding long-term debt. if net fixed assets increased by $7,400 during the year, what was the addition to net working capital?"

Respuesta :

Answer : Net additions to working capital $24,500.

We follow these steps to arrive at the answer:

We can arrive at the answer by using the Cash flow identity:

Cash flow from assets = Cash flow to creditors + Cash flow to shareholders (1)

Now,

Cash Flow from Assets = Operating Cash Flow - Net Capital Spending -        Change in Net Working Capital

Substituting the above in (1) above we get,

[tex] Operating Cash Flow - Net Capital Spending - Change in Net Working Capital =  Cash flow to creditors + Cash flow to shareholders [/tex]  (2)

Now, we can calculate Operating Cash Flow as follows:

[tex] Operating Cash Flow = Sales - Production Costs - Other costs - Taxes [/tex]

Substituting the values from the question in the formula above we get,

[tex] Operating Cash Flow = 84,300(423800 - 297400 - 18500 - 23600) [/tex]

Next we compute net capital spending with the following formula

[tex] Net Capital Spending = Net change in fixed assets + Depreciation [/tex]

[tex] Net Capital Spending = $43600 ( 7400 + 36300) [/tex]

Next, we'll calculate cash flows to creditors.

[tex] Cash flow to creditors = Interest paid - (net new debt raised) [/tex]

[tex] Cash flow to creditors = 8600 [2100 - (-6500)] [/tex]

Since the company has redeemed debt worth 6500, it's net borrowing has decreased by 6500 since the beginning of the year. Hence, we've taken it as a negative number.

Next, we calculate cash flow to shareholders

[tex] Cash flow to shareholders = Dividends paid - Net new equity raised

[/tex]

[tex] Cash flow to shareholders = 7500 (12000 - 4500) [/tex]

Substituting all the computed values in (2) we get,

[tex] 84300 - 43700 - Net addition to Working Capital =  8600 +7500 [/tex]

[tex] 40600 - Net addition to Working Capital =  16100 [/tex]

[tex] Net addition to Working Capital = 24500 (40600 - 16100) [/tex]


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