In its most recent financial year a company paid dividends of $7 million, issued new shares...

In its most recent financial year a company paid dividends of $7 million, issued new shares worth $71 million, repaid $6 million in short-term loans, raised $82 million in new long-term loans and paid interest of $5 million. What is the company’s net cash flow from financing activities?

Please explain why each item is a 'financing activity' or not? I need some assistance conceptually with this question. Thank you.

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Expert Solution

Cash flow from financing activities shows the net flows of cash that are used to fund the company. It includes transactions involving debt, equity, and dividends.

Payment of dividends of $7 million: This is a financing activity as these are payments made to the shareholders who actually are financing the company.

Issued new shares worth $71 million:This is a financing activity as the company is raising funds by issuing shares.

Repaid $6 million in short-term loans: Repayment of loan is financing activity.Repayment involves outflow of cash of the company to its lenders who have given finance to the company.Returning the loan is therefore a financing activity.

Raised $82 million in new long-term loans :This is a financing activity as the company is raising funds by borrowing money from bank or other sources.

Paid interest of $5 million: Interest is the payment made to lenders/banks for the finance given by them. Therefore it is a financing activity.

In simple terms, we can find out financing activity using the below formula

CFF = CED − (CD + RP)

where:CED = Cash in flows from issuing equity or debt

CD = Cash paid as dividends and interest

RP = Repurchase of debt and equity (Repayment of loans)

ekkarill92 answered 1 year ago

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