A company issues $2.6 million of new stock and pays $351,000 in cash dividends d

Question

A company issues $2.6 million of new stock and pays $351,000 in cash dividends during the year. In addition, the company took advantage of falling interest rates to borrow $1.66 million in a new bond issue and paid off existing bonds with a face value of $2.80 million. The company bought 516 of another company's $1,160 bonds at a $116,000 premium. The net cash flow provided by financing activities is:

a)An outflow of $116,000.
b)An inflow of $1,109,000.
c)An outflow of $351,000.
d)An inflow of $1,140,000.

Explanation / Answer

Option b is the correct answer. There is a net cash inflow of $1,109,000 on account of financing activities. The last mentioned transaction of the company buying bonds of another company belongs in the category of investing activities, and hence should not be considered.

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