Griffey Communications recently realized $110,000 in operating income. The company had interest income of $35,000 and realized $70,000 in dividend income. The company’s interest expense was $55,000. Its corporate tax rate is 25%. Griffey is a small company, so it is not subject to the interest expense deduction limitation.
Assume a 50% dividend exclusion for taxes on dividends.
Which of the following most closely matches the tax liability of Griffey Communications?
Last year, Stewart-Stern Inc. reported $11,250 of sales, $4,500 of operating costs other than depreciation, and $1,250 of depreciation. The company had $4,500 of bonds outstanding that carry a 7.00% interest rate, and its federal-plus-state income tax rate was 25.00%. During last year, the firm had expenditures on fixed assets and net operating working capital that totaled $1,500. These expenditures were 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 $750. By how much will the depreciation change cause (1) the firm's net income and (2) its free cash flow to change? Note that the company uses the same depreciation for tax and stockholder reporting purposes. Do not round the intermediate calculations.
| Δ Net Income |
Δ Free Cash Flow |
