Butterfly Tractors had $14 million in sales last year. Cost of goods sold was $8 million, depreciation

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Butterfly Tractors had $14 million in sales last year. Cost of goods sold was $8 million, depreciation expense was $2 million, interest payment on outstanding debt was $1 million, and the firm’s tax rate was 21%.

a. What was the firm’s net income?

b. What was the firm’s cash flow?

c. What would happen to net income and cash flow if depreciation were increased by $1 million?

d. Would you expect the change in depreciation to have a positive or negative impact on the firm’s stock price?

e. What would be the impact on net income if depreciation was $1 million and interest expense was $2 million?

f. What would be the impact on cash flow if depreciation was $1 million and interest expense was $2 million?

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Fundamentals of Corporate Finance

ISBN: 978-1260566093

10th edition

Authors: Richard Brealey, Stewart Myers, Alan Marcus

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