Sales for Year 2 of the New Project Are Expected

question 4

Multiple Choice

Sales for year 2 of the new project are expected to increase by 10%. Current assets are expected to increase by 17% for every dollar increase in sales while accounts payable are expected to increase by 6%. For year 2 the change in cash flows due to working capital will be:

• A) +10% of sales.
• B) -10% of sales.
• C) +1.1% of sales.
• D) -1.1% of sales.

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Definitions:

Equity Income

Equity income refers to earnings a company generates from its investments in the stocks of other companies, represented as a share of the profits from the equity interest.

Common Stock

Common Stock represents shares in a company that entitle holders to a share of the profits in the form of dividends and voting rights in certain company decisions.

Equity Method

An accounting technique used by firms to assess the profits earned by their investments in other companies, where the investment is recorded at original cost and adjusted to reflect the investee's changes in net assets.

Dividends

Payments made by a corporation to its shareholder members, typically from profits or retained earnings, and often in the form of cash or stock.