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 provided by 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 provided by financing activities can be calculated as follows:

Proceeds from stock issuance = $1 million (inflow)
Cash dividends paid = $200,000 (outflow)
Proceeds from new bond issue = $1.5 million (inflow)
Repayment of existing bonds = $2 million (outflow)
Purchase of bonds at a premium = $100,000 (outflow)

Net cash flow provided by financing activities = (1,000,000 - 200,000 + 1,500,000 - 2,000,000 - 100,000) = $300,000 (inflow)

Therefore, the best choice is D.

A Company Issues $1 Million of New Stock and Pays