Question

Q1. Interpret the various factors affect the cash flow of a Corporation.

Q2. Abdullah is working as a supervisor in an organization. He will retire from the company on 31^st      July 2018. He will not get pension from the company after his retirement. He wishes to deposit some amount in a bank which earns interest @ 8% per year. Please advise Abdulla how much he invests to get an interest income of $30,000 a year.

Answer 1

1.There are four factors that affect cash flow in an organization. They are:

a. Debt level: Poor debt management can destroy any business. Cash flow is substantially reduced due to high debt level as the net income is used to pay off the debt.

b. Tax level: The firm must know how much taxes will be deducted as profit is earned. Proper planning is required every quarter to set aside the appropriate amount and the minimum amount should be paid to avoid penalty.

c. Core capital: The firm should set a core capital target equal to the two month operating expenses and taxes so that the firm has enough cash flow to pay off debt.

d. Dividend payout ratio: Cash flow to the company is the net income - dividend paid to the shareholders. The firm has to arrive at the optimal dividend payout ratio which will satisfy shareholders and also keep enough retained earnings for the firm to drive growth.

2.Let amount to be invested be X

Interest =$30000

R=8%

30000=0.08X

X=$375000