During 2019, Rainbow Umbrella Corp. had sales of $820,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $575,000, $90,000, and $160,000, respectively. In addition, the company had an interest expense of $100,000 and a tax rate of 21 percent. (Assume that interest is fully deductible.) Suppose the company paid out $57,000 in cash dividends. If spending on net fixed assets and net working capital was zero, and if no new stock was issued during the year, what was the net new long-term debt?

$2000

Explanation:

The computation of the net new long term debt is shown below:

Before that we need to do the following calculations

Sales $820,000

Less:

Cost of Goods sold $575,000

administrative and selling expenses $90,000

Depreciation $160,000

EBIT -$5,000

less: Interest $100,000

Taxable income –$105,000

Taxes (21%) 0

Net income -$105,000

Now Operating cash flow is

= EBIT + Depreciation -Taxes

= -$5,000 + 160,000 - 0

= $155,000

As we know that

Change in NWC = Net capital spending = Net new equity = 0

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

where,

Cash flow from assets is

= $155,000 - 0 - 0

= $155,000

Cash flow to stockholders is

= Dividends - Net new equity

= $57000 - 0

= $57000

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

= $155000 - 57000

= $98,000

Cash flow to creditors = Interest - Net new LTD

Net new LTD = Interest - Cash flow to creditors

= $100,000 - 98,000

= $2000

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