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Free cash flow The income statement reports a company’s earnings, but not the actual amount of...

Free cash flow

The income statement reports a company’s earnings, but not the actual amount of cash generated by a company. Earnings data can be manipulated and can be deceiving. Thus, corporate decision makers and security analysts focus on the free cash flow generated by a firm to analyze its real cash position.

Which of the following statements best describes a company’s free cash flow?

The cash flow available for distribution to all investors after the company has made all investments in fixed assets and working capital necessary to sustain a firm’s ongoing operations

The excess cash generated by revenues less all operating expenses

Suppose you are the only owner of a chain of coffee shops near universities. Your current cafés are doing well, but you are interested in starting a fine-dining restaurant. You decide to use the cash generated from your existing business to enter into a new business. Your accountant provides you with the following data on your current financial performance:

Relevant financial data:

Your existing business generates $123,000 in EBIT.

The corporate tax rate applicable to your business is 35%.

The depreciation expense reported in the financial statements is $23,429.

You don’t need to spend any money for new equipment in your existing cafés; however, you do need $18,450 of additional cash.

You also need to purchase $9,840 in additional supplies - such as cloth tableclothes and napkins, and more formal tableware - on credit.

It is also estimated that your accruals, including taxes and wages payable, will increase by $6,150.

Based on your evaluation you have in free cash flow.

Can a company have negative free cash flow?

No

Yes

Expert Solution

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

jeff jeffy answered 2 years ago

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