Question

During the year, belyk paving co. had sales of $2,395,000. cost of goods sold, administrative and selling expenses, and depreciation expense were $1,430,000, $435,500, and $490,500, respectively. in addition, the company had an interest expense of $215,500 and a tax rate of 40 percent (ignore any tax loss carryback or carryforward provisions.). belyk paving co. paid out $405,000 in cash dividends. assume that net capital spending was zero, no new investments were made in net working capital, and no new stock was issued during the year. (enter your answer as directed, but do not round intermediate calculations.)

Answer 1

We need to find net long-term debt added during the year.

Answer: The net long-term debt added during the year is $91,000.

We follow these steps to arrive at the answer:

We calculate Operating Cash flow first.

      Sales   2395000

less  COGS  -1430000

less  S&A     435500  

less  Depreciation    490500

        EBIT       39,000

Since Interest expense is greater than EBIT, Taxable income becomes negative.

The question directs us to ignore losses, so taxable income and therefore taxes are 0.

Now, we can calculate Operating Cash Flow or OCF

$OCF= 529500 (39000 - 0 + 490500)$

We calculate cash flow from assets next

$Cash Flow_{assets}= OCF - net capital spending - net investment in working capital$

Since net capital spending and net investment in working capital is zero,

$Cash Flow_{assets} = OCF$

$Cash Flow_{assets}= 529500$

Next we look at the cash flow entity which is:

$Cash Flow_{assets} = Net cash flows to shareholders + Net cash flows to debt holders$

Since no new equity was issued, net cash flows to share holders is the total amount of dividends paid.

So,

$529500 = 405000 + Net cash flow to debt holders$

$124500 = Net cash flow to debt holders$

Now,

$Net cash flow to debt holders = Interest paid - Net new debt added$

$124500= 215500- Net new debt added$

$Net new debt added = 91000$