...Cash is vitally important in the business world. Without it, no firm will survive fowor long. Consequently, understanding a company’s cash inflows and cash outflows is critical for investors. The statement of cash flows provides a revealing examination of these flows, i.e. how a company makes and spends their cash. Furthermore, the cash flow ratios that can be computed from the statement of cash flow can be very telling. The case study entitled, “Eat at M Restaurant - Cash Flow” analyzes several cash flow ratios of three restaurant companies. The statement of cash flows classifies cash receipts and cash payments into operating, investing, and financing activities. However, with consideration to the long-term profitability of a company, the net cash provided by operating activities may be the most significant. Essentially, it is the amount of cash generated by the company from its main operations. These funds not only fund the business, but also keep the company alive when times are tough in the investing and financing world. Therefore, from an investor’s standpoint, it is imperative that cash flow from operations represents a substantial portion of a company’s profits or net income. The first restaurant company examined, Yum Brands, Inc., experienced a sharp decline in their operating cash flow/current maturities of long-term debt and current notes payable. This ratio indicates a firm’s ability to meet the current maturities of debt. The higher the ratio, the better...
Words: 1022 - Pages: 5
...(NOPAT/equity) – (net interest expense after tax/equity) 7. ROE = (NOPAT/net assets)*(net assets )-( net interest expense after tax/net debt)* (net debt/ equity) 8. ROE =(NOPAT/net assets)*(1+ net debt/equity)-( net interest expense after tax/net debt) )* (net debt/ equity) 9. ROE = operating ROA + (operating ROA- effective interest rate after tax) * (net financial leverage) 10. ROE = operating ROA + spread * net financial leverage 11. Financial leverage = assets/shareholder’s equity 12. ROA = net income/ assets 13. ROA= (net income/ sales)*(sales/ assets) 14. ROA = net profit margin * (sales / assets) 15. ROA =(net income/ sales)*asset turnover 16. Net interest expense after tax = (interest expense-interest income)*(1-tax rate) 17. Net operating profit after tax = net income+ net interest expense after tax 18. Operating working capital = (current asset- cash and marketable equities)-(current liabilities-short term debt and current portion of long term debt) 19. Net long term assets=total long term assets- non interest bearing long term liabilities 20. Net debt = total interest bearing liabilities – cash and marketable securities 21. Net assets = operating working capital + net long term assets 22. Net capital = net debt +shareholder’s equity 23. Net capital = net debt +ROE*net income 24. Spread = operating ROA- effective interest rate after tax 25. Operating ROA = (NOPAT / sales)*(sales/net assets) ...
Words: 690 - Pages: 3
...amount of cash to fund the investment so it needed to engage in debt financing to meet its goal. In the 2007 financial statements, HPL had Net Working Capital of $102.5 Million so it has the capital means to pay off creditors, whichallows HPL to use debt financing. Historically, HPL has been a very conservative company and refrained from using debt as a means to finance projects. The current Debt/Equity for HPL’s industry is 49.1%. If HPL used all debt to finance this investment, its Debt/Equity would be 18.7% (See Appendix B); if it used cash in conjunction with debt, the Debt/Equity would be 16.8%. In both cases, the Debt/Equity is closest to 17.6% which points to a WACC of 9.45%. If the firm undertook a more substantial amount of debt, the cost of the debt would not continue to be 7.75% so it is beneficial for HPL to keep its debt low. n the balance sheet. The company lacks sufficient amount of cash to fund the investment so it needed to engage in debt financing to meet its goal. In the 2007 financial statements, HPL had Net Working Capital of $102.5 Million so it has the capital means to pay off creditors, whichallows HPL to use debt financing. Historically, HPL has been a very conservative company and refrained from using debt as a means to finance projects. The current Debt/Equity for HPL’s industry is 49.1%. If HPL used all debt to finance this investment, its Debt/Equity would be 18.7% (See Appendix B); if it used cash in conjunction with debt, the Debt/Equity...
Words: 1894 - Pages: 8
...Does the Restructuring of Resort Co.’s Original Debt represent a troubled debt restructuring? The restructuring of the debt should be accounted for as a troubled debt restructuring based on the following: To determine if troubled debt restructuring applies, both of the following conditions must be present: 1. The company must be experiencing financial difficulty 2. Creditor must grant concessions ASC 470-60-55-8 provides relevant implementation guidance in determining whether or not debtor is experiencing financial difficulties. 55-8 All of the following factors are indicators that the debtor is experiencing financial difficulties: a. The debtor is currently in default on any of its debt. b. The debtor has declared or is in the process of declaring bankruptcy. c. There is significant doubt as to whether the debtor will continue to be a going concern. d. Currently, the debtor has securities that have been delisted, are in the process of being delisted, or are under the threat of being delisted from an exchange e. Based on estimates and projections that only encompass the current business capabilities, the debtor forecasts that its entity-specific cash flows will be insufficient to service the debt (both interest and principal) in accordance with the contractual terms of the existing agreement through maturity. f. Absent the current modification, the debtor cannot obtain funds from the sources other than the existing creditors at an effective interest rate equal to...
Words: 2524 - Pages: 11
...Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers Michael C. Jensen Harvard Business School MJensen@hbs.edu Abstract The interests and incentives of managers and shareholders conflict over such issues as the optimal size of the firm and the payment of cash to shareholders. These conflicts are especially severe in firms with large free cash flows—more cash than profitable investment opportunities. The theory developed here explains 1) the benefits of debt in reducing agency costs of free cash flows, 2) how debt can substitute for dividends, 3) why “diversification” programs are more likely to generate losses than takeovers or expansion in the same line of business or liquidationmotivated takeovers, 4) why the factors generating takeover activity in such diverse activities as broadcasting and tobacco are similar to those in oil, and 5) why bidders and some targets tend to perform abnormally well prior to takeover. Keywords: Dividend policy, Corporate Payout Policy, Optimal Capital Structure, Optimal Debt, Reivestment Policy, Overinvestment © Copyright 1986. Michael C. Jensen. All rights reserved. American Economic Review, May 1986, Vol. 76, No. 2, pp. 323-329. You may redistribute this document freely, but please do not post the electronic file on the web. I welcome web links to this document at http://papers.ssrn.com/abstract=99580. I revise my papers regularly, and providing a link to the original ensures that readers will receive the most recent version...
Words: 4746 - Pages: 19
...Case - Statement of Cash Flow: Three Examples Exhibit #1 Alpha Corp: In this example we have a case in which years 89, 90 and 91 net income is less than net cash provided by operating activities. One of the major reasons for this appears to have been depreciating high cost of equipment. The depreciation is trending downward over the three-year period indicating less long-term assets are being purchased/capitalized to run operations. While depreciation does not involve cash, it does impact net income. In addition, account payables have been decreasing over the last two years and significant cash has been used in the last year to pay the liability. In 1990 there are significant costs associated with restructuring activities. There were costs in all 3 years but 1990 was almost triple that of 89 or 91. Cash flow from operations did not cover investments in depreciable equipment, capitalized software or dividends paid for all three years. The difference was trending in that operations would soon be able to cover these accounts. Dividends paid out decreases over the three-year period and were not paid in 91. Investing in these types of assets decreased over the 3 years. Funds to cover these costs came from long-term debt as well as the sell of class B stock. It is important to point out that Alpha sold off more than it acquired in new depreciable assets. Alpha is also spending cash on long-term debt as a primary source of financing cash flow. It appears in the past...
Words: 1076 - Pages: 5
...have over 14,000 restaurants, which is nearly double of the nearest competitor. Yum! Brands has been able to position themselves for growth and would be a wise investment due to their long term growth potential. When reviewing data from the financial statements specifically we can see potential in the current ratio and the debt to worth ratios over the last two quarters. Yum brands current ratio for first quarter 2014 stands at 0.84 showing that the companies relative liquidity can handle the majority of their liabilities immediately. When compared to the last quarter of 2013 which stood at 0.75 we can see that liquidity rose by nearly 10 percent. Solvency is also a concern when reviewing possible investments and Yum brands finished the fourth quarter of 2013 with a 74% debt to worth ratio fell to 73% exhibiting growth in shareholder equity. Yum! Brands Debt Security A debt security, also known as fixed income securities, are any debt instrument that is sold or bought between two separate parties and has basic terms that are defined ("Debt," 2014). Terms that are defined are amount borrowed (notional amount), maturity/renewal date, and interest rate (“Debt,” 2014). CD’s, government bonds, municipal bonds, corporate bonds, zero-coupon securities, collateralized securities (such as CMO’s, CDO’s, and...
Words: 2476 - Pages: 10
...Max 6270581 1. What is wrong with building up cash? Provide (at least two) reasons in favor and against keeping cash in the firm. You need a cash reserve for bad economic times. If business is not going very well, you’re making losses, you need some reserves to absorb these losses. If you haven’t built up any cash you won’t be able to absorb these losses and in the worst case you can go bankrupt. When one of your customers or a company you delivered to can’t pay their bill there is a possibility you get short on cash. To be able to still purchase equipment and pay your own bills you need a cash reserve to absorb this loss without going bankrupt. When you have cash you can invest when an opportunity comes by. This can be a favourable thing or a bad thing. When decision making is hasted or a decision is made to invest in a bad investment it is not favourable. You pay tax twice over the cash you build up. The first time you pay tax is when you report it as income. The second time is when it is on your bank account because you pay tax every year over your company’s value. Shareholders also don’t like excess cash because the cash can be used to invest and make a profit, or can be used to repurchase shares, both leading to higher share value. Because debt holders have more rights and bare less risk than equity holders (because they can claim goods in case of bankruptcy) it is cheaper to issue debt than keeping cash. 2. Calculate the present value of tax...
Words: 1501 - Pages: 7
...Colorado State University-Global Campus The statement of cash flows is regarded as one of the most important financial statements in regards to determining the liquidity of a company. Cash is how a business pays its bills and operates its business. Lenders and shareholders look to the statement of cash flows to understand how well a company manages its cash and cash equivalents. The statement of cash flows “classifies cash receipts and cash payments into operating, investing, and financing activities.” (Gibson, 2013). Financial ratios have been created in order to compare cash flows to other variables in the statement of cash flows. The cash flow statement can also be utilized to compare the liquidity and profitability of different companies. Net cash provided by operating activities is a calculation derived from the inflows and outflows of cash in the operating section of the statement of cash flows. The operating activities include the effects from cash transactions and other situations that affect net income. Examples of operating cash inflows are money received from interest, sales on goods and services, and return on equity. Cash outflows include payments to employees, taxes, and payments of interest expense. The operating activities section is presented using either the direct or indirect method. In the indirect method, the statement of cash flows begins with the net income or loss for the period. Additions, such as cash received from customers and interest received, are added...
Words: 1303 - Pages: 6
...Chapter 2 Financial Statements and Cash Flow 财务报表与现金流量 2-0 Key Concepts and Skills • • • • • Understand the information provided by financial statements Differentiate between book and market values Know the difference between average and marginal tax rates Know the difference between accounting income and cash flow Calculate a firm’s cash flow 2-1 2.1 The Balance Sheet （资产负债表） An accountant’s snapshot of the firm’s accounting value at a specific point in time The Balance Sheet Identity is: Assets ≡ Liabilities + Stockholder’s Equity 2-2 U.S. Composite Corporation Balance Sheet 2-3 Alphabet Inc. - Assets Assets As of December 31, 2014 As of December 31, 2015 Current assets: Cash and cash equivalents Marketable securities Total cash, cash equivalents, and marketable securities Accounts receivable Receivable under reverse repurchase agreements Income taxes receivable, net Prepaid revenue share, expenses and other assets Total current assets Prepaid revenue share, expenses and other assets, non-current Non-marketable investments Deferred income taxes Property and equipment, net Intangible assets, net Goodwill Total assets $ 18,347 46,048 $ 16,549 56,517 64,395 9,383 11,556 875 450 591 1,903 3,412 3,139 78,656 90,114 3,187 $ 73,066 3,181 3,079 176 23,883 4,607 15,599 129,187 5,183 251 29,016 3,847 15,869 147,461 $ 2-4 Alphabet...
Words: 2843 - Pages: 12
...million in uncollateralized term loans (the “Original Debt”) outstanding with two lenders, Bank A ($129.6 million) and Bank B ($302.4 million). Note that these are not participating loans. Further, issuance costs associated with the Original Debt in the amount of $3 million remained unamortized as of December 31, 2010 ($900,000 and $2.1 million for the loans held by Bank A and Bank B, respectively). As a result of lower than expected travel during the holiday season, the Company projected a short-term cash flow shortage and would not be able to meet the short-term requirements of the Original Debt. In addition, the Company defaulted on a separate debt instrument with Bank C, which resulted in a cross default on the Original Debt held by Bank A and Bank B. On January 1, 2011, Resort Co. restructured and amended the Original Debt (the “Restructuring”) with Bank A and Bank B. As part of the terms of amending the Original Debt: • The Company sold its 50 percent investment in Resort P in exchange for $250 million, which was used to pay down the loan balance that existed before the amendment. This reduced the Original Debt balance from $432 million to $182 million. • The Company agreed to new interest terms, which included raising the interest rate from 5 percent to 6 percent. The modified interest rate is not considered a below market rate for a debt offering with similar risk. • The Original Debt required annual payments consisting of principal and interest ...
Words: 1100 - Pages: 5
...strongest in the industry. Not only was it debt-free, but the company also held $ 231 million in cash and securities. Common dividends’ paying was one of the largest uses of cash, and the payout ratio is abnormally high 50%. In a word the company have huge cash reserves with not many new profitable project to invest. We believe Blaine was “over-liquid and under-leveled” as the banker concluded from data in Exhibit 1 and 2. Being over liquid could portray the company in a negative way, since many investors might wonder why the company is sitting on such a large amounts of cash. Depending on the industry, it could be, because it is protecting itself from volatility, but it is still may warrant concern from investors. And to absorb the idle cash, pay-out ratio was unreasonably high. Usually, companies prefer raising capital in debt more than equity, because tax shield derived from debt makes debt more attractive to stock issue. And there will be an opportunity cost when a company holds a large sum of cash instead of investing it. What’s more, the shares will scatter if Blaine is all financed by issuing stocks. So there may be a potential problem that some private equity firm may purchase all of Blaine’s outstanding shares and takeover the BKI. In this way, current debt-free capital structure is not so efficient and attractive. Even though Blaine Kitchenware, has always had massive cash reserves, and doesn’t believe in excessive debt levels, further...
Words: 1468 - Pages: 6
...The purpose of this report is to measure the liquidity, activities, profitability, and coverage of Yellow Leaf Fashions Inc. by computing various ratios to evaluate their financial position and performance. The Current ratio and current cash debt coverage ratio will analyze the liquidity of Yellow Leaf Fashions Inc. The liquidity ratios will measure the ability of Yellow Leaf Fashions Inc. to meet their short-term obligations. Current ratio calculation: Current Asset / Current Liabilities = $2,960,278 / $612,792 = 4.83. Findings of the current ratio: A current ratio of 4.83 means that Yellow Leaf Fashions has more than 4 times the amount of current assets than current liabilities. In other words, for every dollar of current debt, Yellow Leaf...
Words: 1000 - Pages: 4
...of Cash Flows The statement of cash flows reports the cash receipts, cash payments, and the net change in cash resulting from the operating, investing, and financing activities of a company during the period. The information in a statement of cash flows should help investors, creditors, and others assess: ▪ The company’s ability to generate future cash flows. By examining relationships between items in the statement of cash flows, investors and others can better predict the amounts, timing, and uncertainty of future cash flows. ▪ The company’s ability to pay dividends and meet obligations. Employees, creditors, stockholders, and customers should be particularly interested in this statement because it alone shows the flows of cash in a business. ▪ The reasons for the difference between net income and net cash provided (used) by operating activities. Many financial statement users investigate the reasons for the difference between net income and cash provided by operating activities and then they can assess for themselves the reliability of the income numbers. ▪ The investing and financing transactions during the period. By examining a company’s investing activities and financing activities, a financial statement reader can better understand why assets and liabilities increased or decreased during the period. Study Objective 2 - Distinguish Among Operating, Investing, and Financing Activities The statement of cash flows classifies cash receipts...
Words: 3088 - Pages: 13
...Cash Flow Statement Definitions A financial statement that reflects the inflow of revenue verses the outflow of expenses resulting from operating, investing and financing activities during a specific time period. Cash flow statements and projections express a business's results or plans in terms of cash in and out of the business, without adjusting for accrued revenues and expenses. The cash flow statement doesn't show whether the business will be profitable, but it does show the cash position of the business at any given point in time by measuring revenue against outlays. Cash flow is determined by looking at three components by which cash enters and leaves a company: core operations, investing and financing. Operations- Measuring the cash inflows and outflows caused by core business operations, the operations component of cash flow reflects how much cash is generated from a company's products or services. Generally, changes made in cash, accounts receivable, depreciation, inventory and accounts payable are reflected in cash from operations. Investing- Investing activities focuses on the purchase of the long-term assets a company needs in order to make and sell its products, and the selling of any long-term assets. It reports changes in equipment, assets or investments relate to cash from investing. Financing- Financing activities include the inflow of cash from investors such as banks and shareholders, as well as the outflow of cash to shareholders as dividends as the...
Words: 903 - Pages: 4
