Problem 2-12 Calculating Total Cash Flows [LO4] Square Hammer Corp. shows the fo

Question

Problem 2-12 Calculating Total Cash Flows [LO4] Square Hammer Corp. shows the following information on its 2018 income statement: Sales = $264,000; Costs = $170,000; Other expenses = $7,900; Depreciation expense = $14,500; Interest expense = $13,300; Taxes = $20,405; Dividends = $10,000. In addition, you’re told that the firm issued $4,800 in new equity during 2018 and redeemed $3,300 in outstanding long-term debt. a. What is the 2018 operating cash flow? (Do not round intermediate calculations.) b. What is the 2018 cash flow to creditors? (Do not round intermediate calculations.) c. What is the 2018 cash flow to stockholders? (Do not round intermediate calculations.) d. If net fixed assets increased by $28,000 during the year, what was the addition to NWC? (Do not round intermediate calculations.)

Explanation / Answer

a

OCF = EBIT + Depreciation – Taxes

=71600+14500-20405

=$65695

b

What is the 2018 cash flow to creditors?

Cash flow to creditors = Interest paid – Net new borrowing  

=13300-(-3300) =$16600

The cash flow to stockholders

Cash flow to stockholders = Dividends paid – Net new equity  

=10000-4800

=$5200

d. If net fixed assets increased by $28,000 during the year, what was the addition to NWC?

Net capital spending = Depreciation + Increase in fixed assets

=14500+28000

=$42500

Cash flow from assets = Cash flow to creditors + Cash flow to stockholders

=16600+5200=21800

Cash flow from assets = OCF – Change in NWC – Net capital spending  

21800=65695-Change in NWC -42500

21800-65695+42500

Change in NWC=1395

Income Statement Sales 264000 Costs 170000 Other Expense 7900 Depreciation 14500 EBIT 71600 Interest 13300 Taxable income 58300 Taxes 20405 Net Income 37895

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