Question

Butterfly tractors had $14 million in sales last year. cost of goods sold was $8 million, depreciation expense was $2 million, interest payment on outstanding debt was $1 million, and the firm's tax rate was 35%.

a. what were the firm's net income and net cash flow? (enter your answers in millions rounded to 2 decimal places.) net income $ million net cash flow $ million
b. what would happen to net income and cash flow if depreciation were increased by $1 million? (input all amounts as positive values. enter your answers in millions rounded to 2 decimal places.) net income by $ million cash flow by $ million
c. would you expect the change in income and cash flow to have a positive or negative impact on the firm's stock price? positive negative
d. what would be the impact on net income if depreciation was $1 million and interest expense was $2 million? increase decrease no change
e. what would be the impact on cash if depreciation was $1 million and interest expense was $2 million? increase decrease no change

Answer 1

A)
Sales. 14
COGS. (8)
Dep. (2)
Interest (1)
Net profit before tax=3 million
Tax. 0.35×3 = (1.05)
Net income= 1.95

Cash flow= net income+ depreciation
Cash flow=1.95+2=3.95

B)
Net income=1.95-1=0.95
Cash flow=3.95+1=4.95

Answer 2

Sales last year is $14 million

Goods sold cost = $8 million

Depreciation expense = $2 million

debt is $1 million.

Profit before tax will be Revenue-Expenses

= $14 million - ($8million + $2 million + $1 million ) = 14 - 11 = 3 million

tax rate is 35 %, so 35% of 3 million = 0.35 x 3 = $1.05 million

Net income = $3 million - $1.05 million = $1.95 million

b. Net income would be reduced by $0.65 million. if depreciation expense were increased by $1 million,

Cash flow (= net income + depreciation) would be increased by -$0.65 million + $1 million = $0.35 million.

c. The impact on stock price is likely to be positive. More cash will be available to the company

d. There will be no impact on the net income, taxable income will remain the same

e the taxes will be the same If interest expense was $2 million and the depreciation was $1 million , but decrease in depreciation would cause a decrease in cash flow by $1 million.

Step-by-step explanation:

Sales last year is $14 million

Goods sold cost = $8 million

Depreciation expense = $2 million

debt is $1 million.

Profit before tax will be Revenue-Expenses

= $14 million - ($8million + $2 million + $1 million ) = 14 - 11 = 3 million

tax rate is 35 %, so 35% of 3 million = 0.35 x 3 = $1.05 million

Net income = $3 million - $1.05 million = $1.95 million

b. Net income would be reduced by $0.65 million. if depreciation expense were increased by $1 million,

Cash flow (= net income + depreciation) would be increased by -$0.65 million + $1 million = $0.35 million.

c. The impact on stock price is likely to be positive. More cash will be available to the company

d. There will be no impact on the net income, taxable income will remain the same

e the taxes will be the same If interest expense was $2 million and the depreciation was $1 million , but decrease in depreciation would cause a decrease in cash flow by $1 million.