Question

True or False.

1a. If EBIT = $10,000, depreciation = $5000 and taxes = $2000, operating cash flow < $10,000.

1b. If the increase in common stock = $2000 and cash flow to owners = $9000, dividends < $10,000.

1c. The payment of both interest and dividends is not a source of funds.

1d. Other things equal, the greater the dividends, the lower the cash flow to owners will be.

13. Other things equal, the greater the increase in long-term debt, the lower the cash flow to creditors will be.

Answer 1

1a: True (operating cash flow is calculated after adding back depreciation in net income which is 3000 in this case after subtracting the expensesof taxes and depreciation from EBIT of $10000)

1b: True (increase in common stock does not amount to cash flow, it is only accounted for through dividends)

1c: True (sorces of funds are retained earnings, equity capital and debt )

1d: False (Higher dividends means more cash flow in the hands of owners)

13: False (cash flow to creditors will keep on increasing in the form of interest if long term debt rises)