A. A company has negative cash from operating activities, and negative cash from investing. Is the...

A. A company has negative cash from operating activities, and negative cash from investing. Is the cash from financing section likely positive or negative? Why?

B. Company A has EBITDA of $3,000,000 with normalized capital expenditures of $2,000,000 per year. Company B has EBITDA of $3,000,000 with normalized capital expenditures of $500,000 per year. Which company will likely trade at the higher EBITDA multiple? Why?

C. Assume that the company was purchased in 2016 for an 8x multiple using $8,400 of debt, and sold in 2019 for an 8x multiple. Assume at the time of sale in 2019 $6,000 of debt was outstanding. What is the equity return?

Solutions

Expert Solution

A negative cash flow from Operating activities implies that the company is not in a position to produce sufficient cash flow to meet its operating expense or provide capital for its future growth.

A negative cash flow from investing activities indicates that the company is purchasing more assets and investing more in its future growth. Sometimes it can show the poor asset purchasing decisions of the company.

If a company is having a negative cash flow from Operating activities and negative cash from Investing activities, it holds a great possibility that cash flow from finacing activites is likely to be positive as the company requires a huge cash balance to meet its operating expense and purchase assets which can be arranged by raising additional capital.

In case, the company is having a huge cash balance available with it already, it may be possible that it don't require to raise further capital.

Capital expenditure is an amount you pay to buy or upgrade a long-term asset.

Higher the capital expenditure, hingher will be the EBITDA multiple Therefore, Company A will likely to trade at the higher EBITDA multiple as compared to Company B.

Profit (2019) = Debt/ Multiple

= 6000/8

= 750

Difference in outstanding debt = 8400-6000

=2400

Total earnings= 2400+750

=3150

Equity return = Net income/ Initial Investment*100

=3150/8400*100

=37.5%

jeff jeffy answered 1 year ago

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