13. Last year, Saran Company has $13,400,000 of sales, $7,300,000 of operating costs (excluding depreciation), and $1,500,000 of depreciation. The company has $6,500,000 of bonds that carry a 7% interest rate, and its federal-plus-state income tax rate is 40%. During last year, the firm has expenditures on fixed assets and net operating working capital that total $2,000,000. These expenditures are 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 $810,000. The company uses the same depreciation calculations for tax and stockholder reporting purposes. What is the effect of the change in depreciation on the net income and the free cash flow? *

6 points

The net income will decrease by $486,000, and the free cash flow will increase by $342,000.

The net income will decrease by $810,000, and the free cash flow will decrease by $324,000.

The net income will decrease by $1,658,000, and the free cash flow will increase to $2,584,000.

The net income will decrease by $2,001,000, and the free cash flow will decrease to $2,584,000.

None of the above

14. The sales of Fiery Corporation for last year are $320,000, and its year-end total assets are $430,000. The industry average of total assets turnover ratio (TATO) is 2.5. The new CFO believes that the corporation has excess assets that can be sold so as to bring the TATO down to the industry average without affecting sales. By how much should the assets be reduced to bring the TATO to the industry average, holding sales constant? *

6 points

$128,000

$172,000