Question

What are all the ways shown below that you could raise cash for a future investment? There are multiple correct choices. You should indicate all of them that are correct.

1. Issue equity (stock)
2. Issue bonds
3. Buy back equity (stock)
4. Buy back bonds
5. Increase working capital
6. Decrease working capital
7. Increase after tax cash flow
8. Decrease after tax cash flow
1. Find legal ways to increase the tax rate (all else equal)
10. Find legal ways to decrease the tax rate (all else equal)

Answer 1

Solution

A.Issue Equity - TRUE - Cash flows in return for the stake / ownership of the company.

B.Issue Bonds - TRUE - Cash flows in as bonds are issued in return for money

C Buy Back Equity - FALSE - Reduces the cash with the company as it involves purchasing more ownership in the company using the existing funds of the company

D.Buy Back bonds - FALSE -Decreases the cash with the company

E.Increase in working capital - FALSE-

Working Capital = Current Assets - Current Liabilities

Working Capital is the capital that is used by the firms to perform day-to-day trading activities.

So,increase in working capital means availability of lesser funds that can be used for investing for future.

F.Decrease in working capital - TRUE - instead of using them as current assets,they can now be used for future investments which yield comparatively more return on investment.

G.Increase after tax cash flow - TRUE - Means the company has more cash left with it that can be utilised by investing in long term

H.Decrease after tax cash flow - FALSE - The company left with comparatively lesser money that can be invested for long-term

I.Find legal ways to increase Tax Rate - FALSE - reduces the cash with the company

J.Find legal ways to decrease Tax Rate - TRUE - increases the availability of cash with the company.

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