Question

Which of the following statements is CORRECT?

a. Operating income is derived from the firm's regular core business. Operating income is calculated as Revenues less Operating costs. Operating costs do not include interest or taxes.

b. Depreciation reduces a firm's cash balance, so an increase in depreciation would normally lead to a reduction in the firm's cash flow.

c. Depreciation is not a cash charge, so it does not have an effect on a firm's reported profits.

d. The more depreciation a firm reports, the higher its tax bill, other things held constant.

e. Because a firm's cash flow is shown as the lowest entry on the income statement, people often call it "the bottom line."

If a stock's market price is above its intrinsic value, then the stock can be thought of as being undervalued, and it would be a good buy.

a. True
b. False

EBIT, often referred to as operating income, stands for "earnings before interest and taxes."

a. True
b. False

Answer 1

Part 1:
Option a is correct.

b)Depreciation is a non cash charge so it does not reduce the cash balance.
c)Depreciation affects a firm's reported profits in income statement.
d)More depreciation will reduce the earnings before tax, this will reduce the tax bill when other things are held constant.
e)Cash flow is not shown in income statement.

Part 2:
This statement is false.
If a stock's market price is above its intrinsic value, then it is said to be overvalued.

Part 3:
This statement is true.
EBIT (earnings before interest and taxes) is often referred to as operating income.