(35%) 0 Net income a. –$140,000 OCF = EBIT + Depreciation Taxes b. – OCF = + 125,000 0 –$75,000 – OCF = $50,000 Net income was negative because of the tax deductibility of depreciation and interest expense. c. However, the actual cash flow from operations was positive because depreciation is a non-cash expense and interest is a financing expense, not an operating expense. A firm can pay out dividends if net income is negative; it just has to be sure there is sufficient 19. cash flow to make the dividend payments. Change in NWC = Net capital spending = Net new equity = 0. (Given) Cash flow from assets = OCF Change in NWC Net capital spending – – Cash flow from assets = $50,000 0 0 = $50,000 – – Cash flow to stockholders = Dividends Net new equity – Cash flow to stockholders = $34,000 0 = $34,000 – Cash flow to creditors = Cash flow from assets Cash flow to stockholders – Cash flow to creditors = $50,000 34,000 – Cash flow to creditors = $16,000 Cash flow to creditors is also: Cash flow to creditors = Interest Net new LTD – So: Net new LTD = Interest Cash flow to creditors – Net new LTD = $65,000 16,000 – Net new LTD = $49,000 20. The income statement is: a. Income Statement Sales $20,300 Cost of goods sold 14,500 Depreciation 2,900 EBIT $ 2,900 Interest 690 Taxable income $ 2,210 Taxes 884 Net income $1,326 OCF = EBIT + Depreciation Taxes b. –
(35%) 0 a. Net income –$140,000 b. OCF = EBIT + Depreciation – Taxes OCF = –$75,000 + 125,000 – 0 OCF = $50,000 c. Net income was negative because of the tax deductibility of depreciation and interest expense. However, the actual cash flow from operations was positive because depreciation is a non-cash expense and interest is a financing expense, not an operating expense. 19. A firm can pay out dividends if net income is negative; it just has to be sure there is sufficient cash flow to make the dividend payments. Change in NWC = Net capital spending = Net new equity = 0. (Given) Cash flow from assets = OCF – Change in NWC – Net capital spending Cash flow from assets = $50,000 – 0 – 0 = $50,000 Cash flow to stockholders = Dividends – Net new equity Cash flow to stockholders = $34,000 – 0 = $34,000 Cash flow to creditors = Cash flow from assets – Cash flow to stockholders Cash flow to creditors = $50,000 – 34,000 Cash flow to creditors = $16,000 Cash flow to creditors is also: Cash flow to creditors = Interest – Net new LTD So: Net new LTD = Interest – Cash flow to creditors Net new LTD = $65,000 – 16,000 Net new LTD = $49,000 20. a. The income statement is: Income Statement Sales $20,300 Cost of goods sold 14,500 Depreciation 2,900 EBIT $ 2,900 Interest 690 Taxable income $ 2,210 Taxes 884 Net income $1,326 b. OCF = EBIT + Depreciation – Taxes
solution-manual-corporate-finance-11th-edition-ross.docx