During 2018, Raines Umbrella Corporation had sales of $ 746,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $ 561,000, $ 88,000 and $ 134,000, respectively. In addition , the company had an interest expense of $ 97,000 and a tax rate of 35 percent . (Ignore any tax loss carryback or carryforward provisions). Assume Raines Umbrella Corporation paid out $ 17,000 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 is the firm’s net new long-term debt ?
In 2018, Raines Umbrella Corporation reported sales of $746,000. To understand the firm’s net new long-term debt for the year, we need to consider various financial components such as expenses, interest, taxes, and dividends, as well as changes in net fixed assets and net working capital.
Operating Income (EBIT): Operating Income, also known as Earnings Before Interest and Taxes (EBIT), can be calculated by subtracting the Cost of Goods Sold (COGS), Administrative and Selling Expenses, and Depreciation Expenses from the sales:
EBIT = Sales – COGS – Administrative Expenses – Selling Expenses – Depreciation EBIT = $746,000 – $561,000 – $88,000 – $134,000 EBIT = $746,000 – $783,000 EBIT = -$37,000
Raines Umbrella Corporation had an operating loss of $37,000.
Interest Expenses: The company also incurred an interest expense of $97,000 during the year.
Taxation: The tax rate for the company is 35 percent. To calculate the tax expense, we apply this rate to the taxable income (which, in this case, is the negative EBIT):
Tax Expense = Tax Rate * EBIT Tax Expense = 0.35 * (-$37,000) Tax Expense = -$12,950
The negative sign indicates a tax benefit or a reduction in taxes.
Net Income: Net Income is calculated by subtracting the Tax Expense from EBIT:
Net Income = EBIT – Tax Expense Net Income = (-$37,000) – (-$12,950) Net Income = -$24,050
The company incurred a net loss of $24,050.
Dividends: Raines Umbrella Corporation paid out $17,000 in cash dividends. This represents the cash outflow to shareholders.
Net New Long-Term Debt: To calculate the net new long-term debt, we need to consider the changes in the company’s financing during the year. Since there was no mention of new stock issuance or changes in net fixed assets and net working capital, we can focus on changes in the financial liabilities.
Net New Long-Term Debt = Interest Expense – Dividends Net New Long-Term Debt = $97,000 – $17,000 Net New Long-Term Debt = $80,000
The firm’s net new long-term debt for the year is $80,000.
In summary, Raines Umbrella Corporation incurred an operating loss of $37,000 in 2018. After considering interest expenses, taxes, and dividends, the company’s net new long-term debt for the year amounted to $80,000. This implies that the company borrowed an additional $80,000 in long-term debt to support its operations and financial activities during the year, given the specified conditions.
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