Assignment 2: Case Analysis Advanced Financial Analysis Computer Analytic Technology Systems (CATS) Corporation is a manufacturer...

Assignment 2: Case Analysis Advanced Financial Analysis Computer Analytic Technology Systems (CATS) Corporation is a manufacturer of computer components. CATS had recently doubled its plant capacity, opened new sales offices outside its home territory, and launched an expensive advertising campaign. You have been hired as a consultant and have been asked to answer each question below. Be sure to show all calculations and state any assumptions that you make (though I am not sure you need to make any). Financial statements and other miscellaneous data are provided below.

E) What is free cash flow? Why is it important? What are the five uses of FCF?

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Expert Solution

Free Cash Flow is the actual cash that comes into the firm after its operations. This is also a measure of profitability like net income but unlike net income FCF excludes non cash expenses like depreciation. FCF to firm is the actual amount that is distributed among the creditors and the share holders.

Formula for FCF can be given as below:

FCF= EBIT -Taxes +depreciation -increase in working capital-capex

another form is FCF= Operating Cash Flow -capex

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FCF is important because it shows the actual cash inflow to a company due to its operations which determine its sustainability and is important parameter for banks to give loans and for shareholders to access valuations.

5 uses:

Used in DCF method for calculating the value of the firm (FCF to firm)
Used in APV(Adjusted Present Value) methof for valuation (FCF to equity)
Used by Banks to check the debt paying capacity of a firm
Used by shareholders to estimate the fair market value of firm
Used by Equity analyst
Can be used internally by the company to self assess its operations

jeff jeffy answered 1 year ago

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