15) Suppose that a company is deciding between raising debt (with interest and principal repayments) and raising equity, and management wants to understand the financial impact of both alternatives.

Which of the following statements CORRECTLY describe the immediate impact and the impact after one year?

a) *Immediately* after the company raises debt, Net Income on the Income Statement would be lower, Cash on the Balance Sheet would be lower, and Cash Flow from Financing would be higher.

b) *Immediately* after the company issues equity, Net Income would be unaffected, Cash on the Balance Sheet would increase, and the Equity side of the Balance Sheet would increase.

c) One year after the company raises debt, Net Income would be lower due to interest, and the Net Change in Cash on the CFS would be lower due to debt principal repayments.

d) One year after the company raises equity, Net Income would be unchanged, Cash on the Balance Sheet would be higher, and the Equity side of the Balance Sheet would remain higher.

19) You are analyzing the Net Income and Cash balances of a company over the past three years (shown below). You find that Net Income is increasing, but Cash is decreasing. What are possible explanations for this trend?

ENDING CASH BALANCE: Year 1: 250 Year 2: 200 Year 3: 150

ANNUAL NET INCOME: Year 1: 50 Year 2: 100 Year 3: 150

a) In Years 2 and 3, the company made large capital expenditures.

b) The company has high working capital requirements (such as purchasing inventory in advance of selling products).

c) The company has a large debt balance that requires high annual principal repayments.

d) None of the above this scenario could never happen in real life.