Last year, Stewart-Stern Inc. reported $11,250 of sales, $4,500 of operating cos

Question

Last year, Stewart-Stern Inc. reported $11,250 of sales, $4,500 of operating costs other than depreciation, and $1,250 of depreciation. The company had $3,500 of bonds outstanding that carry a 6.5% interest rate, and its federal-plus-state income tax rate was 35%. During last year, the firm had expenditures on fixed assets and net operating working capital that totaled $2,000. These expenditures were necessary for it to sustain operations and generate future sales and cash flows. This year's data are expected to remain unchanged except for one item, depreciation, which is expected to increase by $1,800. By how much will the depreciation change cause (1) the firm's net income and (2) its free cash flow to change? Note that the company uses the same depreciation for tax and stockholder reporting purposes

Net income and fee cash flow needed

Explanation / Answer

(1) The firm's net income as below :-

2. Free cash flow to change :-

                  Fund avilable $3,427

less           Purchase of fixed assets          $2,000

                  Balance fund                          $1,427

sales $11,250 operating costs $4,500 opereting profit $6,750 Depreciation $1,250 E.B.I.T $5,500 Interest on bond ($$3,500 * 6.5%) $228 E.B.T $5,272 Tax Paid 35% $1,845 E.A.T $3,427       Net income $3,427

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