Profits versus Cash Flow. Butterfly Tractors had $14 million in sales last year. Cost of goods sold was S8 million, depreciation expense was $2 million, interest payment on outstanding debt was $1 million, capital expenditures were $1 million, and the firn's tax rate was 35 percent.
a. What were the firm's net incomes? Cash flows from operations, and cash flow from assets?.
b. What would happen to net income and cash flows if depreciation were increased by $1 million? How do you explain the differing impact of depreciation on income versus cash flow?
c. Would you expect the change in income and cash flows from the change in depreciation to have a positive or negative impact on the firm's stock price?
d. Now consider the impact on net income and cash flow if the firm s interest expense were $1I million higher. Why is this case different from part (b)?