Questions

COMM_V 370 101-108 2025W1 COMM 370-Practice Midterm-2025-W1

Multiple dropdown selections

Indicate the effect on this period’s FCF of a change in each of the items listed here. Assume a $100 increase in each case and a 40% tax rate. A. Net income. [ Select ] 0 -100 +40 -40 -60 +60 +100 B. Operating costs (excluding depreciation). [ Select ] -40 +40 -100 +60 0 +100 -60 C. Depreciation. [ Select ] 0 -60 +60 +40 -40 +100 -100 D. Interest expense [ Select ] +60 0 -60 -40 +40 -100 +100 E. EBIT. [ Select ] -60 -40 -100 +100 0 +40 +60 F. Accounts receivable. [ Select ] -100 -40 +60 +40 0 -60 +100 G. Accounts payable. [ Select ] +100 +40 -60 0 +60 -40 -100 H. Property, plant, and equipment. [ Select ] 0 +40 -60 -100 +100 +60 -40 I. Notes payable. [ Select ] -40 +100 -10 -60 0 +60 +40 J. Cash dividends paid. [ Select ] -60 0 +40 +60 -40 +100 -100 K. Proceeds from issuing new common shares. [ Select ] +100 -40 -60 0 -100 +40 +60 L. Common shares repurchased. [ Select ] -40 +60 -100 -60 0 +40 +100

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Question restatement and options: - A. Net income. - B. Operating costs (excluding depreciation). - C. Depreciation. - D. Interest expense - E. EBIT. - F. Accounts receivable. - G. Accounts payable. - H. Property, plant, and equipment. - I. Notes payable. - J. Cash dividends paid. - K. Proceeds from issuing new common shares. - L. Common shares repurchased. Answer selections provided for each item (A through L): A: +100 B: -60 C: +60 D: 0 E: 0 F: 0 G: 0 H: 0 I: 0 J: 0 K: 0 L: 0 Analysis of each item: - A. Net income Interpretation: If net income increases by $100 (before tax effect), the after-tax increase in net income is $100 × (1 − tax rate). With a 40% tax rate, after tax NI rises by $60. In typical free cash flow (FCF) calculations, the period’s FCF increases by the after-tax NI contribution, assuming no other cash adjustments. Therefore, the correct impact on FCF would be +60, not +100. The given selection +100 overstates the cash flow benefit by ignoring taxes, and is therefore incorrect. - B. Operating costs (excluding depreciation) Interpretation: An increase of $100 in operating costs reduces pretax income by $100. Tax savings? Since operating costs reduce EBT (earnings before tax) by 100, taxes drop by 40 (assuming tax base mirrors the cost reduction). Net after-tax effect on NI is −100 × (1 − tax) = −60, but FCF is impacted by changes in cash costs directly: higher operating costs reduce cash flow by $100 before tax, and the tax shield on that expense reduces tax by $40, yielding a net FCF effect of −60. Therefore the impact on FCF should be −60, not −60 alone if we were counting tax shield correctly; the given option for B was -60, which aligns with the standard after-tax impact on FCF for a $100 increase in costs. - C. Depreciation Interpretation: An extra $100 of depreciation is a non-cash expense; it reduces pretax income by $100, saving taxes by $40, so the NI decreases by $60, but since depreciation is a non-cash charge added back in FCF, the FCF increases by the tax shield of depreciation, i.e., +40? Wait: In standard FC......Login to view full explanation

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