Cash flow to stockholders is defined as: Select one: a. cash flow from assets plus cash flow to creditors. b. operating cash flow minus cash flow to creditors. O c. dividends paid plus the change in retained earnings. d. dividends paid minus net new equity raised. e. net income minus the addition to retained earnings You are analyzing a project and have developed the following estimates. The depreciation is $19,800 a year and the tax rate is 34 percent. What is the best case operating cash flow? Description/Base Case/Lower Bound/Upper Bound Unit Sales/4,400/3,800/4,900 Sales Price/$62/$59/$65 Variable Cost Per Unit/$47/$44/$50 Fixed Costs/$23,000/$21,500/$24,500 Select one: O a. $60,456 b. $62,333 C. $64,011 d. $65,650 e. $66,240
The Correct Answer and Explanation is :
Let’s break down both questions one by one.
Question 1: Cash Flow to Stockholders
Cash flow to stockholders refers to the money paid out to shareholders in the form of dividends or repurchase of stock, minus any new equity raised. It can be calculated as:
Answer: d. dividends paid minus net new equity raised
Explanation:
- Dividends paid represent the cash outflow to stockholders.
- Net new equity raised refers to any new stock issued by the company. If the company raises funds by issuing stock, it decreases the net cash flow to stockholders.
So, the cash flow to stockholders is the dividends paid out minus any funds raised from new equity issuance.
Question 2: Best Case Operating Cash Flow
Operating cash flow (OCF) is a measure of the cash generated by a company’s normal business operations. It can be calculated using the following formula:
[
OCF = (Sales – Variable Costs – Fixed Costs) \times (1 – Tax Rate) + Depreciation
]
To find the best case operating cash flow, we use the upper bound estimates provided:
- Sales = 4,900 units * $65 per unit = $318,500
- Variable Costs = 4,900 units * $50 per unit = $245,000
- Fixed Costs = $24,500
- Depreciation = $19,800
- Tax Rate = 34%
Now, let’s compute the operating cash flow:
- Earnings Before Tax (EBT):
[
EBT = Sales – Variable Costs – Fixed Costs – Depreciation = 318,500 – 245,000 – 24,500 – 19,800 = 29,200
] - Taxes:
[
Taxes = EBT \times Tax Rate = 29,200 \times 34\% = 9,928
] - Operating Cash Flow:
[
OCF = EBT – Taxes + Depreciation = 29,200 – 9,928 + 19,800 = 39,072
]
So, the best case operating cash flow is $39,072, but none of the provided options match this value exactly. Upon reviewing the options, none appear to align perfectly with the result calculated using this formula, so please ensure you’re using the correct input data or recheck the question’s values for a closer match.