Last year, Stewart-Stern Inc. reported $11,250 of sales, $4,500 of operating costs other than depreciation, and...

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Last year, Stewart-Stern Inc. reported $11,250 of sales, $4,500of operating costs other than depreciation, and $1,250 ofdepreciation. The company had $3,500 of bonds outstanding thatcarry a 6.50% interest rate, and its federal-plus-state income taxrate was 35.00%. During last year, the firm had expenditures onfixed assets and net operating working capital that totaled $2,000.These expenditures were necessary for it to sustain operations andgenerate future sales and cash flows. This year's data are expectedto remain unchanged except for one item, depreciation, which isexpected to increase by $1,225. By how much will the depreciationchange cause (1) the firm's net income and (2) its free cash flowto change? Note that the company uses the same depreciation for taxand stockholder reporting purposes. Do not round the intermediatecalculations.

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A Calculation of Free Cash Flows Last Year Particulars Amount Sales 11250 Less Operating Costs 4500 Less Depreciation 1250 Less Interest Cost 228 Profit Before Tax 5273 Less Tax at 35 See Answer

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Last year, Stewart-Stern Inc. reported $11,250 of sales, $4,500of operating costs other than depreciation, and $1,250 ofdepreciation. The company had $3,500 of bonds outstanding thatcarry a 6.50% interest rate, and its federal-plus-state income taxrate was 35.00%. During last year, the firm had expenditures onfixed assets and net operating working capital that totaled $2,000.These expenditures were necessary for it to sustain operations andgenerate future sales and cash flows. This year's data are expectedto remain unchanged except for one item, depreciation, which isexpected to increase by $1,225. By how much will the depreciationchange cause (1) the firm's net income and (2) its free cash flowto change? Note that the company uses the same depreciation for taxand stockholder reporting purposes. Do not round the intermediatecalculations.