BFN 110 Lecture Notes - Lecture 21: Free Cash Flow, Tunxis Community College, Leveraged Buyout

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coralimpala133

6 Jan 2021

School

Tunxis Community College

Department

Business – Finance

Course

BFN 110

Professor

garside

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Document Summary

Cash paid and received from buying and selling of goods and services. Not good quality source of cash cash paid and received from investment activities (bonds, stocks, property, equipment) Cash paid and received from financing activities (dividends, borrowing or issuing stocks, repayment or issuing debt) Minus: capital expenditures (required to maintain the productive capacity of the firm) Minus: dividends (needed to maintain the necessary payout on common stock and to cover any preferred stock obligation) Fcf represents cash available for special financial activities. Free cash flow in reviewed to determine if there are sufficient excess funds to pay back the loan associated with leveraged buy-outs. Corporate taxes vary by province, by type of business and by size of business. Cash flows after-tax are most relevant for decision making. After-tax investment income paid to shareholders to other individuals varies depending upon the form of the income. Expenses deductible from taxable income provide a tax shield (tax savings)

Related Questions

Question 8

Which of the following is NOT one of the steps taken in the financial planning process?
Answer Forecast the funds that will be generated internally. If internal funds are insufficient to cover the required new investment, then identify sources from which the required external capital can be raised.
Monitor operations after implementing the plan to spot any deviations and then take corrective actions.
Determine the amount of capital that will be needed to support the plan.
Develop a set of forecasted financial statements under alternative versions of the operating plan in order to analyze the effects of different operating procedures on projected profits and financial ratios.
Consult with key competitors about the optimal set of prices to charge, i.e., the prices that will maximize profits for our firm and its competitors.
.2 points
Question 9

Which of the following statements is CORRECT?
Answer Since accounts payable and accrued liabilities must eventually be paid off, as these accounts increase, AFN as calculated by the AFN equation must also increase.
Suppose a firm is operating its fixed assets at below 100% of capacity, but it has no excess current assets. Based on the AFN equation, its AFN will be larger than if it had been operating with excess capacity in both fixed and current assets.
If a firm retains all of its earnings, then it cannot require any additional funds to support sales growth.
Additional funds needed (AFN) are typically raised using a combination of notes payable, long-term debt, and common stock. Such funds are non-spontaneous in the sense that they require explicit financing decisions to obtain them.
If a firm has a positive free cash flow, then it must have either a zero or a negative AFN.
.2 points
Question 10

Spontaneous funds are generally defined as follows:
Answer Assets required per dollar of sales.
A forecasting approach in which the forecasted percentage of sales for each item is held constant.
Funds that a firm must raise externally through short-term or long-term borrowing and/or by selling new common or preferred stock.
Funds that arise out of normal business operations from its suppliers, employees, and the government, and they include immediate increases in accounts payable, accrued wages, and accrued taxes.
The amount of cash raised in a given year minus the amount of cash needed to finance the additional capital expenditures and working capital needed to support the firm

BFN 110 Lecture Notes - Lecture 21: Free Cash Flow, Tunxis Community College, Leveraged Buyout

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