A company expects to have Net Income (NI) next year of $16million and Cash Flow from Assets (CFFA) of $20.5million. The corporate tax rate is 30%.

If the company increases its leverage by issuing debt and buying back equity so that its interest expense rises by $1.5million, what will be the new Net Income and CFFA?

Remember:

NI=(RevCOGSFCDeprIntExp).(1tc)

CFFA=NI+DeprCapExNWC+IntExp

All answers are given in the same order:

Net Income; CFFA

a.

$14.50m; $21.00m

b.

$14.95m; $15.40m

c.

$14.95m; $20.95m

d.

$17.05m; $15.40m

e.

$17.05m; $18.55m