Question

Accounting statements represent a company’s earnings, but this is not the real cash that a company generates. Earnings data can be manipulated and can be deceiving. Thus, corporate decision makers and security analysts focus on the free cash flow that a firm generates to analyze the company’s real cash position.

Which of the following statements best describes free cash flow?

Residual cash flow after taking into account operating cash flows, including fixed-asset acquisitions, asset sales, and working-capital expenditures

Cash flows generated by operating the business

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:

Financial update as of June 15

•	Your existing business generates $75,000 in EBIT.
•	The corporate tax rate applicable to your business is 25%.
•	The depreciation expense reported in the financial statements is $14,286.
•	You don’t need to spend any money for new equipment in your existing cafés; however, you do need $11,250 of additional cash.
•	You also need to purchase $6,000 in additional supplies—such as tableclothes and napkins, and more formal tableware—on credit.
•	It is also estimated that your accruals, including taxes and wages payable, will increase by $3,750.

Based on your evaluation you have ____ in free cash flow.

Can a company have negative free cash flow?

Yes

No

Answer 1

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

? v 1 1 ENG 12:46 02-02-2020 25 X FD269 - 249 - FA fx FB FC FO E F F FH II 250 251 LESS 252 75000 18750 56250 14286 70536 ADD EBIT TAX EBIT (1-t) DEPRECIATION OPERATING CASH FLOW INVESTMENT IN OPERATING CAPITAL ADDITIONAL CAPITAL EXPENDITURE INCREASE IN NWC ((11250 + 6000 ) -(6000 + 3750)) 253 254 255 256 257 7500 258 259 260 261 7500 (0 + 7500] 63036 (70536-7500) FCF (FREE CASH FLOW) 262 ANSWER BASED ON YOUR EVALUATION, YOU HAVE 63036 IN FREE CASH FLOW 263 264 ANSWER YES 265 266 267 268 269 270 271 272 ... OCF CASH FLOW STATW FCF ARM, MSI,confidenceINDEX CURRENCY LOAN CROSS OVER GM HPRAM TAX HEDGING MONEY MARKET GROWTH SL ... :