Book 3_FinAn_Reading-33_ANALYZING-STATEMENTS-OF-CASH-FLOWS-II

Question 1

A common-size cash flow statement

Answer 1

• Shows each item as a percentage of revenue
• or Shows each cash inflow as a percentage of total inflows and each outflow as a percentage of total outflows

Question 2

Free cash flow to the firm (FCFF)

Answer 2

FCFF = net income + noncash charges + [cash interest paid × (1 − tax rate)] − fixed capital investment − working capital investment
= CFO + [cash interest paid × (1 − tax rate)] − fixed capital investment

Question 3

Free cash flow to the firm (FCFF) - notes

Answer 3

• Interest: If it belongs to CFF, don’t need to adjust
• Dividend: If dividend included in CFO, need to adjust but don’t include tax adjustment because divident is no tax

Question 4

Free cash flow to equity (FCFE)

Answer 4

FCFE = CFO − fixed capital investment + net borrowing
= FCFF − [interest paid × (1 − tax rate)] + net borrowing

Question 5

Cash flow performance ratios

Answer 5

cash return on equity or on assets

Question 6

cash coverage ratios

Answer 6

debt coverage or cash interest coverage

Question 7

The reinvestment ratio

Answer 7

CFO/cash paid for long-term assets.