Question

In: Finance

A firm generates $500K in cash from operations, spent $100K in cash for investing activities and...

A firm generates $500K in cash from operations, spent $100K in cash for investing activities and had negative $390K in cash from financing activities for a total change in cash of positive $10K for the year. What was its Free Cash Flow for the year? Was the firm self-financing during the year? Explain your answer

Solutions

Expert Solution

Solution

From the given data we find that

CFO => Cash flow from operating activities = 500000

CFI => Cash flow spent on investing activities = 100000

CFF =>Cash flow from financing activities = -390000 ( Here negative sign indicating an outflow)

Free cash flow for the year can be computed using the formula Cash flow from operating activities - Cash flow spent on investing actvities

( Note: Here we do not include cash flow from financing activities because FCF is a part of the cash flow you could take out of the company (to pay down debt, or pay a dividend to shareholders) without affecting its operational capability to pay the bills, and without hurting the investment plan.

=> Free cash flow for the year = 500000-100000

= $400000

Yes, company was able to self finance during the year as company has paid its liabilites(outflow from financing activities) out of the free cash flow($400K) for the year and manged to be cash positive($10 K remaining). Company's free cash flow is greater than the cash flow from financing activities.


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