A company issues $1 million of new stock and pays $200,000 in cash dividends during the year.In addition,the company took advantage of falling interest rates to borrow $1.5 million in a new bond issue and paid off existing bonds with a face value of $2 million.The company bought 500 of another company's $1,000 bonds at a $100,000 premium.The net cash flow from financing activities is:
A)An inflow of $500,000.
B)An outflow of $200,000.
C)An outflow of $100,000.
D)An inflow of $300,000.

Question

Quizplus · Accepted Answer

The net cash flow from financing activities is the sum of all inflows and outflows resulting from transactions involving the company’s sources of capital (e.g. issuing stock, borrowing money, paying dividends, buying or selling bonds).

In this case, the company issued $1 million of new stock, resulting in an inflow of cash. They also borrowed $1.5 million through a new bond issue, which is another inflow of cash. However, they used part of this money ($2 million) to pay off existing bonds, resulting in an outflow of cash.

The company also paid $200,000 in cash dividends, which is an outflow of cash. Finally, they bought 500 bonds at a premium, which is another outflow of cash.

To calculate the net cash flow from financing activities, we add up all the inflows and subtract all the outflows:

$1 million (stock issue) + $1.5 million (new bond issue) - $2 million (bond repayment) - $200,000 (dividend payment) - $100,000 (bond purchase premium) = $300,000

Therefore, the answer is D: an inflow of $300,000.

A Company Issues $1 Million of New Stock and Pays