Question

13) Kootenay Logging Corporation anticipates cash flows from operating activities of $1.5 million in 2020, it plans on spending $900,000 on capital. They plan on paying a $5 dividend to each of their 60,000 shareholders and a $1.50 dividend to each of their 10,000 preferred shareholders. a) Calculate Kootenay Logging Corporation's free cash flow for 2020. What does the represent? b) Assuming Kootenay Logging Corporation decides to spend $1.2 million on capital and wants to maintain a minimum cash balance of $150,000, will they need to find outside financing? How much?

Answer 1

Answer.

Free cash flow (FCF) represents the cash available for the company to repay creditors or pay dividends and interest to investors.

1. Free cash flow :

( Cash from operations - Capital expenditures)

ie. ($1500000 - $900000)

ie. $600000.

* ($1 million = $1000000)

2.

Yes, if company wants to expends more on capital expenditures and also wants to maintain a level of cash in hand,

The new free cash flow will be :

Cash from operations - ( capital expenditures + maintained cash balance)

ie. ($1500000 - ( $1200000 + $150000))

ie. $150000.

Now, company is planning to pay dividend of $5 for each 60000equity and $1.5 for each 10000prefered.

Hence total dividend amount would be :

($300000 + $15000)

ie. $315000.

It means it needs to outside financing.

Thank you ?.

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