cash flow - Q&A Flashcards
/A company raises €500m in shareholders’ equity for an R&D project. Has it become richer
or poorer? By how much? What is your answer if the company spends half of the funds
in the first two years, and the project does not produce results? In the third year, the
company uses the remaining funds to acquire a competitor that is overvalued by 25%.
But thanks to synergies with this new subsidiary, it is able to improve its earnings by
€75m. Has it become richer or poorer? By how much?
/Neither. Zero, poorer by €250m. Richer by €25m: 75 – 250 × [25%/(1 + 25%)]
/What are the accounting items corresponding to additions to wealth for shareholders,
lenders and the State?
/Net income, financial expenses, corporate income tax.
/In concrete terms, based on the diagram on page 35, by how much does a company create
wealth over a given financial period? Why?
EBIT (Operating profit) + non-recurring items – corporate income tax. The wealth created
is the wealth to be divided up between lenders (financial expenses), the State (corporate
income tax) and shareholders (the balance).
/Comment on the following two statements: “This year, we’re going to have to go into
debt to cover our losses” and “We’ll be able to buy out our main competitor, thanks to
the profits we made this year”.
Confusion between additions to and deductions from wealth (which is an accounting issue)
and cash: in the former, new borrowings do not add wealth to cover the losses; in the latter, profit is not the means used to finance an investment as it does not translate 100% in
cash.
/In 2014, a company’s free cash flow turns negative. Has the company created or destroyed
wealth?
There is nothing that tells us whether wealth has been destroyed or created as we do not
know what net income for 2014 is.
/Does EBITDA always flow directly into a company’s bank account?
/No, because income and costs may not necessarily correspond to immediate cash receipts
or expenses.
/Is it correct to say that a company’s wealth is increased each year by the amount of
EBITDA?
/Is it correct to say that a company’s wealth is increased each year by the amount of
EBITDA?
According to the terminology used in Chapter 2, is depreciation a cash outflow or a cost?
What is the difference between these two concepts?
/It is a non-cash charge, not a cash expense, i.e. a cost that is recorded, but which does not
have to be cashed out.
/Analyse the similarities and the differences between cash and wealth, looking at, for
example, investment in real estate and investment in research.
Will repayment of a loan always be recorded on the income statement? Will it always be
recorded under a cash item?
/After reading this chapter, can you guess how to define bankruptcy?
The inability to find additional resources to meet the company’s financial obligations.
