Free Cash Flow

In: Business and Management

Submitted By kamore
Words 371
Pages 2
Case study

Question 1

Question 2 The free cash flow tells us that the company had the majority of its financing originate from the external capital. They would tend to acquire large short-term and long-term loans to purchase fixed assets and also fund their operation costs. It, therefore, shows it was endowed in debts and opted to reduce its dividends to try and reduce the wealth flowing out. The company also made a loss in 2014, they, however, devised new strategies and operation methods as the year turned to a close. It would prove beneficial since the operating costs would decrease in 2015 and they would see them make large sales, hence gaining a large net income in 2015.
Question 3

Question 4

They would have to place $336, 485.67 as their principal amount to gain the $500,000 amount within five years.
Question 5
The company should opt to increase their profit margin, as this would result in an increase in net income that would support its increase in assets. It would, therefore, reduce the need for external capital. It would reduce the need for external capital required by the company. They should opt for a change in operation, which would see them boost their sales price or reduce their costs. The margin would rise further, thus permitting faster growth of the company with less need for external capital (Gonzalez, 2007). The company can reduce their need for external capital for 2016 by employing a strategy that would see them reduce the money flowing out in terms of dividends. The company will, therefore, gain more from its retained profits and use it as their internal capital. The strategy will prove effective if they want to reduce the need for external capital and become more self-dependent. Companies love keeping their dividends and rising, to attract more shareholders to the company. Using this strategy would see their equity…...

Similar Documents

Free Cash Flow

...Ismail & Sanusi —An Empirical Analysis of Cash Flow and Investment Fluctuations ... Gadjah Mada International Journal of Business January-April 2005, Vol. 7, No. 1, pp. 95—107 AN EMPIRICAL ANALYSIS OF CASH FLOW AND INVESTMENT FLUCTUATIONS USING FIRM-LEVEL PANEL DATA* Abd. Ghafar Ismail Nur Azura Sanusi Since the pioneering work of Gurley and Shaw (1955), the attempt has been done to justify money as a primary focal point of macroeconomic theorizing. However, other researchers argue that variables such as financial development and indicators are also important to be linked with macroeconomic performance. Here, if money can be thought as means of production and consumer goods as the ultimate end toward which production is directed, and then capital also occupies a position that is both logically and temporarily intermediate between original means and ultimate ends. This temporarily intermediate status of capital is not in serious dispute, but its significance for macroeconomic theorizing is rarely recognized. The firms’ decision to acquire funds through debt and equity financings affects the capital structure, and, in the firm’s balance sheet, the impact of capital appears to influence the inventory investment. Hence, the significance of capital structure –induced inventory distortions in the context of firm-level is the basis for our article. The sample for our analysis is compiled from the balance sheets of listed syaria firms in the Kuala Lumpur Stock Exchange for the......

Words: 5153 - Pages: 21

Free Cash Flow

...Free Cash Flow: Free, But Not Always Easy Read more: March 08 2010 | Filed Under » Fundamental Analysis, Stock Analysis, Stocks The best things in life are free, and the same holds true for cash flow. Smart investors love companies that produce plenty of free cash flow (FCF). It signals a company's ability to pay debt, pay dividends, buy back stock and facilitate the growth of business - all important undertakings from an investor's perspective. However, while free cash flow is a great gauge of corporate health, it does have its limits and is not immune to accounting trickery. (For background reading, see Analyzing Cash Flow The Easy Way.) What Is Free Cash Flow? By establishing how much cash a company has after paying its bills for ongoing activities and growth, FCF is a measure that aims to cut through the arbitrariness and "guesstimations" involved in reported earnings. Regardless of whether a cash outlay is counted as an expense in the calculation of income or turned into an asset on the balance sheet, free cash flow tracks the money. To calculate FCF, make a beeline for the company's cash flow statement and balance sheet. There you will find the item cash flow from operations (also referred to as "operating cash"). From this number subtract estimated capital expenditure required for current operations: Cash Flow From Operations (Operating Cash) - Capital Expenditure......

Words: 878 - Pages: 4

Cash Flow

...CONCEPTS a. The statement of cash flows details the actual cash generated through a specific time period, usually for fiscal year ending 20XX, for example. The cash flow statement, specifically, identifies the actual cash flowing in and out of the company and reveals how a company spends its money. Conversely, the income statement is based on the accrual method of accounting and will contain revenue, for example, that has not been received or expenses that have not yet been paid. b. The two separate methods to prepare the statement of cash flows is the direct and indirect method. Weis Markets uses the indirect method of accounting due to the fact the company uses the accrual method of accounting and derives data from both the balance sheet and income statement. Most companies, public companies specifically, use the indirect method of accounting as most implement accrual accounting. Smaller companies on a cash basis would use the direct method for statement of cash flows. c. The three sections of the statement of cash flows is investing, operating, and financing activities. d. Operating activities pulls from items on the income statements. Investing activities reports the purchase and/or sale of investments and property, plant, and equipment on the balance sheet. Financing activities reports the issuance and repurchases of company stocks, bonds, and payments of dividends on the balance sheet. e. Cash equivalents are current, highly liquid assets......

Words: 532 - Pages: 3

Cash Flow

...Cash Flow Greg George December 7, 2013 Cash flow statements are important for every business. Cash flow statements tell investors, banks, and the company’s management what is going on with the company’s cash. Investors want to know if a company can and if they have paid dividends and a cash flow statement can provide this kind of information. When banks look at giving a loan to a company they look at a lot of different statements and on of them is the cash flow statement. From a cash flow statement banks can determine if a company is handling there cash intake and out flow correctly. A cash flow statement can also show if a company is doing something shady with their money or taking unnecessary risks that would put investors and bank at risk of not getting their investment back. Cash flow statements are classified into three sections; operating, investing, and financing activities. Each section tells a different story inside the cash flow statement. The cash flow statement is separated into three sections so that investors and banks can get a better understanding of each part of the cash flow statement. Each section stands for the following; “Operating activities include the cash effects of transactions that create revenues and expenses. They thus enter into the determination of net income. Investing activities include (a) acquiring and disposing of investments and property, plant, and equipment, and (b) lending money and collecting the loans. Financing......

Words: 399 - Pages: 2

Cash Flow

...Summary. 5) Suggestion and conclusion 1)INTRODUCTION i) Statement of problem:- Cash flow statement is a statement which describes the inflow and out flows of cash and cash equivalents in an enterprise during a specific period of time. Such a statement enumerates net effects of the various business transactions on cash & its equivalents and takes in to account receipts and disbursement of cash. Cash flow statement summaries the cause of changes in cash position of a business enterprise between dates of two Balance sheets. According to AS-3, enterprises should prepare a cash flow statement and should present it for each period for which financial statement are prepared. The terms cash, cash equivalents and cash flows are used in this statement which the following meanings:- 1. Cash: - Cash comprises cash on hand and demand deposit with bank. 2. Cash equivalents are short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of charge in value. Cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes. For an investment to qualify as a cash equivalent, it must be readily convertible to an insignificant risk of change in value. Therefore, an investment normally qualifies as a cash equivalent only when it has a short maturity of say, three months or less from the date of acquisition. For......

Words: 1439 - Pages: 6

Cash Flow

...1. Explain why investors should use the statement of cash flows. Cash flow is one of the most important measurements used by investors in valuing a company. You will hear the term used in the context of understanding how much a company is really growing (or not) after accounting conventions are stripped out of the income statement. Cash flow measures the amount of cash that a company brings in and uses during the course of an accounting period (quarter or year) after all fixed expenses are eliminated. This number is frequently called earnings before interest, taxes, depreciation and amortization (EBITDA). The reason investors are interested in cash flow is that it gives them a clearer picture of what the company is truly doing. Deductions When you begin deducting interest, taxes, depreciation and amortization, you distort what positive or negative cash flows the company’s operations generated. The four items (interest, taxes, depreciation and amortization) have nothing to do with the company’s actual operations and are accounting conventions for reducing income for tax purposes. Here’s how each one distorts operating performance: * Interest – Companies can deduct interest expense from their income for tax purposes. This deduction will change from year-to-year as more or less debt is on the books. * Taxes – Taxes are subject to change as laws change and the company’s business and accounting practices may change. This deduction also reduces net income. ...

Words: 1718 - Pages: 7

Cash Flow

...4/8/2011 Cash Flows Scribd Upload a Document Search Books, Presentations, Business, Academics... Search Documents Explore Documents Books - Fiction Books - Non-fiction Health & Medicine Brochures/Catalogs Government Docs How-To Guides/Manuals Magazines/Newspapers Recipes/Menus School Work + all categories Featured Recent People Authors Students Researchers Publishers Government & Nonprofits Businesses Musicians Artists & Designers Teachers + all categories Most Followed Popular Sign Up | Log In 1/48 4/8/2011 Cash Flows STATEMENT OF CASH FLOWS TRUE-FALSE STATEMENTS 1. The statement of cash flows is a required statement that must be prepared along with an income statement, balance sheet, and retained earnings statement. For external reporting, a company must prepare either an income statement or a statement of cash flows, but not both. A primary objective of the statement of cash flows is to show the income or loss on investing and financing transactions. A statement of cash flows indicates the sources and uses of cash during a period. Operating activities include the cash effects of transactions that create revenues and expenses. In preparing a statement of cash flows, the issuance of debt should be reported separately from the retirement of debt. Noncash investing and financing activities must be reported in the body of a statement of cash flows. The statement of cash flows classifies cash receipts and......

Words: 1958 - Pages: 8

Cash Flow

...Cash Flow Assignment Companies are required to prepare a statement of cash flows (SCF) in their annual reports because it contains necessary information for external users, such as lenders and investors, who make economic decisions about the companies. It presents the sources and uses of cash and is a basis for cash flow analysis. Because it shows how much actual cash a company has generated, it presents if and how the company is able to pay for its operations and future growth. Companies produce and consume cash in different ways, so the cash flow statement is divided into three sections: cash flows from operations, financing and investing. Basically, the sections on operations and financing show how the company gets its cash, while the investing section shows how the company spends its cash. The cash flow statement is the newest of the three financial statements; companies have only been required to furnish investors with it since 1988. The cash flow statement is similar to the income statement, except that it dispenses with some of the abstract items found on the income statement (such as depreciation) and focuses on actual cash. Most of the information found on the cash flow statement is contained in either the income statement or the balance sheet, but here it is organized in such a way that it is difficult for companies to use accounting tricks to obscure the facts. The cash flow statement is broken down into three parts: Here you’ll find how much money the......

Words: 645 - Pages: 3

Cash Flow

...Balance Sheet and Statement of Profit and Loss (Consolidated) STATUTORY REPORTS 44 Notice 53 Directors’ Report 69 Management Discussion & Analysis 104 Corporate Governance 125 Secretarial Audit Report Chairman’s Message To ensure long-term competitiveness of Tata Motors, the company also took several steps under the Horizonext strategy. FINANCIAL STATEMENTS Standalone Financial Statements 126 Independent Auditors’ Report 130 Balance Sheet 131 Statement of Profit and Loss 132 Cash Flow Statement 134 Notes to Accounts Consolidated Financial Statements 170 Independent Auditors’ Report 172 Balance Sheet 173 Statement of Profit and Loss 174 Cash Flow Statement 176 Notes to Accounts Subsidiary Companies 207 Financial Highlights 210 Listed Securities issued by Subsidiary Companies during FY 2013-14 14 Major Launches during the Year Our products represent the Horizonext philosophy with best-in-class offerings. 38 Summarised Balance Sheet and Statement of Profit and Loss (Standalone) 40 Funds Flow - Last Five Years 41 Financial Statistics 30 ANNUAL GENERAL MEETING Date Awards and Accolades Range Rover Sport won the SUV of the Year award by Top Gear magazine in the UK, EVO in MENA, Car and Drive in China. Thursday, July 31, 2014 Time 3.00 p.m. Venue Birla Matushri Sabhagar, 19, Sir Vithaldas Thackersey Marg, Mumbai 400 020 Horizonext, rolled out last year as a next-level strategy, helps us anticipate customer requirements and deliver exciting......

Words: 116965 - Pages: 468

Measuring Free Cash Flows for Equity Valuation: Pitfalls and Possible Solutions

...The article, Measuring Free Cash Flows For Equity Valuation: Pitfalls and Possible Solutions by Juliet Estridge and Barbara Lougee, provides a guide to cash flows definition that aims to helps inventors avoid common pitfalls while providing inside to corporate performance and value. This article looks at two different valuation methods along with corresponding studies and evidence. The article begins with the definition of value and “free cash flow”. Miller and Modigliani demonstrate that the value of the company is the present value of its future expected operating profits net of the new capital investment required to sustain the business. Using this basic analytical framework, M&M came up with two valuation approaches: discounted cash flow approach and investment opportunities approach. Joel Stern recognizes the term “free cash flow” as net operating profits after taxes minus the amount of new capital invested. However, accounting methodologies pose limits on valuations metrics: inconsistency, misclassification, ease of manipulation, and measurement errors. The article provides an example of the difference measures used for cash flow among various companies such as P&G, The Gap, and others. The first valuation method is multiples, which include only recurring or sustainable cash flows and excludes discretionary cash flows. The article shows an example of the price to free cash flow multiple (P/FCF) and “cash flow to yield” (FCFfY) as an increasingly popular......

Words: 376 - Pages: 2

Cash Flow

...The statement of cash flow's primary purpose is to provide information regarding a company's cash inflows and outflows during a specified accounting period. This paper will focus more on how cash flow is helpful to external users. The statement of cash flow complements the income statement and the balance sheet. When credit decisions are made, many factors must be assessed. According to FASB (SFAS-95, paragraph 5) the information on actual cash flows is useful to help creditors, investors, and other external parties asses (1) the ability of an enterprise to generate positive future net cash flows, meet its obligations, and pay dividends; (2) the needs for external financing; (3) the reasons for the differences between cash flow from operating activities and net income (or change in net assets); and (4) the effects on financial position of cash and non-cash investing and financing activities. Cash flows are classified as operating, investing, or financing activities. Operating activities relates to company’s primary revenue generating activities such as cash generated from the sale of goods and cash paid from merchandise. Investing activities includes lending money and collecting on loans related to noncurrent assets. For example, cash generated from the sale of land. Financing activities include borrowing and repaying money from creditors related to noncurrent liabilities and owners’ equity. The goal is for company to have a positive cash flow from operating. This is the......

Words: 1046 - Pages: 5

Cash Flow

...productiva actual. La falta de flujo de efectivo disponible puede ser un indicador de problemas de liquidez. Referencias Carl S. Warren, (2008), Survey of Accounting, fourth edition, (chapter 4 Accounting for merchandising Business) Kieso Weygandt Warfiel (2010), Intermediate Accounting, thirteenth edition, (chapter 10 Acquisition and disposition of property, plant and equipment) James Jiambalvo (2008), Managerial Accounting, third edition, (chapter 5 Balance Sheet and Statement of Cash Flows) CFO Free Cash Flow Scorecard.”CFO Magazine, 1 de enero 2005. Jill Krutick, Fortune, 30 de marzo de 1998, p. 106. Web sites: Other references: CFO Free Cash Flow Scorecard.”CFO Magazine, 1 de enero 2005. Jill Krutick, Fortune, 30 de marzo de 1998, p. 106....

Words: 1941 - Pages: 8

Cash Flows

...Direct Method: ABC Company Direct Statements of Cash Flow for December 31, 2013 © 2013 Cash flows from operating activities Cash Sales 4,523.00 Collections on Receivables 6,739.00 Purchases (1,332.00) Cash paid to employees (wages) (987.00) Cash paid to suppliers (1,028.00) Cash generated from operations 7,915.00 Interest payments (12.00) Tax Payments (275.00) Net cash from operating activities 7,628.00 Cash flows from investing activities Capital Expenditures (1,389.00) Payments for Businesses Acquired (206.00) Proceeds from Sales of Property and Equipment 88.00 Net cash used in investing activities (1,507.00) Cash flows from financing activities Proceeds from Long-Term Borrowings 5,222.00 Repayments of Long-Term Debt (1,289.00) Repurchases of Common Stock (8,546.00) Proceeds from Sales of Common Stock 241.00 Cash Dividends Paid to Stockholders (2,243.00) Other Financing Activities (37.00) Net cash used in financing activities (6,652.00) Net increase (decrease) in cash (531.00) Indirect Method: ABC Company Indirect Statements of Cash Flow for December 31, 2013 © 2013 Cash flows from operating activities Profit before taxation 8,467.00 Adjustments for: Depreciation 1,627.00 Investment......

Words: 428 - Pages: 2

Cash Flows

...BRIEF EXERCISE 5-12 Cash Flow Statement | | | | Operating Activities | | | Net income | | $40,000 | Depreciation expense | $ 4,000 | | Increase in accounts receivable | (10,000) | | Increase in accounts payable | 7,000 | 1,000 | Net cash provided by operating activities | | 41,000 | Investing Activities | | | Purchase of equipment | | (8,000) | | | | Financing Activities | | | Issue notes payable | $20,000 | | Property dividends | (5,000) | | Net cash flow from financing activities | | 15,000 | Net increase in cash ($41,000 – $8,000 + $15,000) | | $48,000 | Free Cash Flow = $41,000 (Net cash provided by operating activities) – $8,000 (Purchase of equipment) – $5,000 (Dividends) = $28,000. BRIEF EXERCISE 5-13 Cash flows from operating activities | | | Net income | | $151,000 | Adjustments to reconcile net income to net cash provided by operating activities | | | Depreciation expense | $44,000 | | Increase in accounts payable | 9,500 | | Increase in accounts receivable |  (13,000) | 40,500 | Net cash provided by operating activities | | $191,500 | EXERCISE 5-16 (a) Shabbona Corporation | Statement of Cash Flows | For the Year Ended December 31, 2014 | Cash flows from operating activities | | ...

Words: 404 - Pages: 2

Cash Flows

...“Financial Accounting, sixth edition”, cash flow “permits a company to expand operations, replace worn assets, take advantage of new investment opportunities, and pay dividends to its owners”. Analyzing cash flow enables one to understand what happened to cash and cash equivalents throughout a specific period – how to the beginning balance of cash become the ending balance. The statement classifies cash flow in three different categories; operating activities, investing activities, and financing activities. To better understand and prepare the statement manipulating the balance sheet equation is a must. Assets can be further broken down into cash/cash equivalents and noncash asset. It is important to note that any change in cash also results in a change of liabilities, stockholder’s equity or noncash assets. With all of this, the “new” equation follows, change in cash = change in liabilities + change in SE – change in noncash assets. Cash flows from operating activities relate directly to revenues and expenses on the income statement. Examples of cash inflow activities include cash received from customers, dividends and interest on investments. Examples of outflows would be salaries, wages and income taxes. There are two methods in which one can present operating activities on the statement. It is important to note that both methods will provide the same number. The first is the direct method. This method “reports components of cash flow as gross receipts and......

Words: 1340 - Pages: 6