Question

The 2014 balance sheet of Jordan's Golf Shop, Inc., showed long-term debt of $6.1 million, and the 2015 balance sheet showed long-term debt of $6.35 million. The 2015 income statement showed an interest expense of $210,000. The 2014 balance sheet showed $600,000 in the common stock account and $5.7 million in the additional paid-in surplus account. The 2015 balance sheet showed $640,000 and $6.2 million in the same two accounts, respectively. The company paid out $605,000 in cash dividends during 2015. Suppose you also know that the firm's net capital spending for 2015 was $1,460,000, and that the firm reduced its net working capital investment by $87,000. What was the firm's 2015 operating cash flow, or OCF? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, e.g., 1,234,567.)

Answer 1

Ans:- In this question, we need to find the firms 2015 Operating Cash Flow or OCF. for 2015.

For that First, we will find the cash flow to the creditors.

Cash Flow to the creditors will be given by (Interest expense - Net new borrowings).

And Net new borrowings =Long term debt in 2015 - Long Term debt in 2014

= $6,350,000 - $6,100,000.

=$250,000.

Now cash flow to the creditors = $210,000 - $250,000 =-$40,000.

Now we will find the cash flow to the stockholders.

Cashflow to the stockholders will be given by (Dividend Paid - Net new equity).

The Net New Equity will be given by

[(common stock in 2015 + Additional Paid in Surplus account in 2015) - (common stock in 2014 + Additional Paid-in surplus in 2014]

= [($640,000 + $6,200,000) - ($600,000 + $5,700,000)]

= $540,000.

Now cash flow to the stockholders will ($605,000 - $540,000 = $65,000).

Now the cash flow from the assets will be given by (cash flow to the creditors + cash flow to the stockholders).

=(-$40,000 + $65,000)

= $25,000.

But cash Flow from assets also equals to

[Operating Cash Flow(OCF) - Change in NWC(Net-working capital) - Net Capital Spending]

Therefore $25,000 = OCF - (-$87,000) - $1,460,000.

$25,000 = OCF + $87,000 - $1,460,000.

Operating Cash Flow =$25,000 - $87,000 + $1,460,000.

=$1,398,000 is the required OCF in 2015.

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