Last Year,Stewart-Stern Inc $$\Delta \text { Net Income } \quad \Delta \text { Free Cash Flow }$$

question 80

Multiple Choice

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 6.50% interest rate,and its federal-plus-state income tax rate was 35.00%.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 $1,225.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.Do not round the intermediate calculations. $$\Delta \text { Net Income } \quad \Delta \text { Free Cash Flow }$$
?

• A) -$796.25;$428.75
• B) -$772.36;$330.14
• C) -$939.58;$437.33
• D) -$724.59;$505.93
• E) -$923.65;$475.91

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Definitions:

Economic Cost

The total cost of choosing one action over another, including both explicit costs and opportunity costs.

Opportunity Cost

The cost of forgoing the next best alternative when making a decision.

Accounting Profit

The total revenue of a business minus the explicit costs and depreciation, calculated using standard accounting practices.

Annual Revenue

The total income generated by a company or an organization from its operations, calculated on a yearly basis.