The management of Wyatt Corporation is frustrated because its parent company, SRW Corporation, repeatedly rejects Wyatt's capital spending requests. These refusals led Wyatt's management to conclude its operations play a limited role in the parent's long-range plans. Acting on this assumption, Wyatt's management approaches a merchant banking firm about the possibility of a leveraged buyout of itself. In their proposal, Wyatt management stresses the stable, predictable cash flows from Wyatt's operations as more than adequate to service the debt required to finance the proposed leveraged buyout. As a partner in the merchant banking firm, you investigate the feasibility of their proposal. You receive the following balance sheet and supplementary information for Wyatt Corporation. The management of Wyatt further discloses that, following their proposed purchase, they intend to acquire machinery costing $325,000 in each of the next three years to overcome the previous low level of capital expenditures while a subsidiary of SRW Corporation. Management argues these expenditures are needed for competitive reasons.

Required:
a. Using information in the balance sheet and the supplementary disclosures, prepare a statement of cash flows (indirect method) for the year ended December 31, Year 10.
b. Using the statement of cash flows from a and assuming that debt service is $300,000 per year after the lever aged buyout, evaluate the feasibility of management'sproposal.

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WYATT CORPORATION Balance Sheets December 31, Year 10 and Year 9 Year 9 Year 10 Assets Cash Accounts receivable Inventory Total current assets Land 175,000 192,000 359,000 683,000 888,000 1,234,000 138,000 3,885,000 (916,000) (1.131,000) $3,844,000 $4,126,000 248,000 465,000 126,000 Building and machiner3,746,000 Less accumulated depreciation Total assets Liabilities and Shareholders' Equity Accounts payable. Taxes payable.. Other short-term payables.... Total current liabilities Bonds payable .. Total liabilities.... Common stock Retained earnings Total shareholders equity Total liabilities and equity 156,000 259,000 124,000 417,000 800,000 825,000 1,472,000 1,625,000 863,000 149,000 325,000 630,000 842,000 846,000 1,526,000 1,638,0 72 000 2501,000 $3,844,000 $4,126,000