Question

3–15. (Analyzing the cash flow statement) The cash flow statements for retailing giant BigBox, Inc., spanning the period 2013–2016 are as follows:

(US$ millions)	12/31/2016	12/31/2015	12/31/2014	12/31/2013
Net income	$ 13,000	$ 12,000	$ 11,000	$ 10,000
Depreciation expense	6,500	6,300	5,000	4,000
Changes in working capital	1,200	2,300	2,400	1,000
Cash flow from operating activities	$ 20,700	$ 20,600	$ 18,400	$ 15,000
Capital expenditures	$ (16,000)	$ (14,500)	$ (14,000)	$ (12,300)
Cash flow from investing activities	$ (16,000)	$ (14,500)	$ (14,000)	$ (12,300)
Interest and financing cash flow items	$ (350)	$  (250)	$  (350)	$  100
Total cash dividends paid	(3,600)	(2,800)	(2,500)	(2,200)
Issuance (retirement) of stock	(8,000)	(1,500)	(3,600)	(4,500)
Issuance (retirement) of debt	1,500	(100)	4,000	4,100
Cash flow from financing activities	$ (10,450)	$ (4,650)	$ (2,450)	$ (2,500)
Net change in cash	$  (5,750)	$ 1,450	$ 1,950	$  200

Answer the following questions using the information found in these statements:

1. Does BigBox generate positive cash flow from its operations?

2. How much did BigBox invest in new capital expenditures over these four years?

3. Describe BigBox’s sources of financing in the financial markets over these four years.

4. Based solely on the cash flow statements for 2013 through 2016, write a brief narrative that describes the major activities of BigBox’s management team over these four years.

Answer 1

(a): Yes, BigBox do generate positive cash flow from its operations. We can see that in all the years i.e. 2013 to 2016 the company generated positive cash flow from operations.

(b): The amount of new capital expenditures invested by BigBox over these four years is provided below:

Year	Amount
2013	12,300.00
2014	14,000.00
2015	14,500.00
2016	16,000.00
Total	56,800.00

(c):  The primary source of financing for the company over the four years is debt. Except for 2015 the company issued debt in all the years. In 2015 the company paid off $100 worth of debt. The company is not issuing new stock but is rather retiring its existing stock. For example in 2016 the company retired stocks to the tune of $8,000. Thus we can say that the company is financing mainly through debt.

(d): BigBox’s management team is focusing on expansion and we can see this from the company’s increasing level of capital expenditure (capex). Part of this expansion is financed by issuing fresh debt and a part of the expansion must thus be getting financed through retained earnings. The management is increasing its financial risk by taking on more leverage.