BUS314 CH3 HW
Suppose you are the only owner of a chain of coffee shops near universities. Your current cafés are doing well, but you are interested in starting a fine-dining restaurant. You decide to use the cash generated from your existing business to enter into a new business. Your accountant provides you with the following data on your current financial performance: Financial update as of June 15 •Your existing business generates $123,000 in EBIT. •The corporate tax rate applicable to your business is 25%. •The depreciation expense reported in the financial statements is $23,429. •You don't need to spend any money for new equipment in your existing cafés; however, you do need $18,450 of additional cash. •You also need to purchase $9,840 in additional supplies—such as tableclothes and napkins, and more formal tableware—on credit. •It is also estimated that your accruals, including taxes and wages payable, will increase by $6,150. Based on your evaluation you have ________ in free cash flow.
103379 By using the values just given, solve for the available free cash flow in the following FCF equation. Note that no new equipment nor other investments in fixed assets is needed. You will not be making any additional capital expenditures, so Capital Expenditure = $0. Start with EBIT(1 - Tax), also called NOPAT (which stands for net operating profit after taxes), and then continue to solve for FCF as follows: FCF=[EBIT x (1 - Tax rate)] + Depreciation - Capital Expenditures - Increase in Net Working Capital=[EBIT x (1 - Tax rate) + Depreciation] - Additional Capital Expenditures - [(Increase in Cash + Increase in Supplies) - (Increase in Accounts payable + Increase in Accruals)]FCF=[$123,000 x (1 - 0.25)] + $23,429 - $0 - [$18,450 + $9,840) - ($9,840 + $6,150)]=[$92,250 + $23,429] + $0 - ($18,450 - $6,150)=[$92,250 + $23,429] + $0 - $12,300=$103,379 You have $103,379 of free cash flow available from your coffee shop business. Because you are the only owner of the coffee shops, you may use the free cash flow for any purpose that you wish. In large public companies, free cash flows are meant to be used to maximize shareholder wealth.
NOW Inc. released its annual results and financial statements. Grace is reading the summary in the business pages of today's paper. In its annual report this year, NOW Inc. reported a net income of $156 million. Last year, the company reported a retained earnings balance of $510 million, whereas this year it increased to $600 million. How much was paid out in dividends this year? $4 million $246 million $66 million $335 million
66 Million Retained earnings reported in a company's financial statements refers to the portion of the net income that the company retains rather than distributing as dividends to stockholders. Companies use accumulated retained earnings for reinvestment purposes or to pay debt, which means that the dividends a company pays are the balance of net income left after the company's contribution toward its retained earnings. Thus, dividends paid would be the difference between net income and the contribution to retained earnings. It is calculated as follows: Dividends Paid=Net Income - (Ending Retained Earnings - Beginning Retained Earnings)=$156 - ($600 - $510) million=$66 million The statement of stockholders' equity, or the retained earnings statement, for NOW Inc. would look like this: NOW Inc. Statement of Stockholders' Equity (Millions of dollars) Balance of retained earnings last year$510Add: Net income (this year)$156Less: Dividends paid (this year)$66Balance of retained earnings this year$600 Note that companies can choose not to distribute any dividends for a particular year for various reasons.
NOW Inc. released its annual results and financial statements. Grace is reading the summary in the business pages of today's paper. In its annual report this year, NOW Inc. reported a net income of $144 million. Last year, the company reported a retained earnings balance of $425 million, whereas this year it increased to $500 million. How much was paid out in dividends this year? $3 million $350 million $69 million $219 million
69 Million Retained earnings reported in a company's financial statements refers to the portion of the net income that the company retains rather than distributing as dividends to stockholders. Companies use accumulated retained earnings for reinvestment purposes or to pay debt, which means that the dividends a company pays are the balance of net income left after the company's contribution toward its retained earnings. Thus, dividends paid would be the difference between net income and the contribution to retained earnings. It is calculated as follows: Dividends Paid=Net Income - (Ending Retained Earnings - Beginning Retained Earnings)=$144 - ($500 - $425) million=$69 million The statement of stockholders' equity, or the retained earnings statement, for NOW Inc. would look like this: NOW Inc. Statement of Stockholders' Equity (Millions of dollars) Balance of retained earnings last year$425Add: Net income (this year)$144Less: Dividends paid (this year)$69Balance of retained earnings this year$500 Note that companies can choose not to distribute any dividends for a particular year for various reasons.
Globo-Chem Co. reported net sales of $600 million last year and generated a net income of $132.00 million. Last year's accounts receivable increased by $17 million. What is the maximum amount of cash that Globo-Chem Co. received from sales last year? $291.50 million $437.25 million $149.00 million $583.00 million
An increase in accounts receivable means that earnings from sales have been reported in the net sales but cash was not collected. To calculate the maximum amount of cash that Globo-Chem Co. collected from its customers, subtract the increase in accounts receivable from net sales as follows: Actual Cash Collected=Net Sales - Increase in Accounts Receivable=($600 - $17) million=$583.00 million
What happened to assets, earnings, dividends, and cash flows during the financial year? Accounting practice in the United States follows the generally accepted accounting principles (GAAP) developed by the Financial Accounting Standards Board (FASB), which is a nongovernmental, professional standards body that monitors accounting practices and evaluates controversial issues. The Securities and Exchange Commission (SEC) requires all publicly traded companies to periodically report their financial information. A publicly held corporation must publish an annual report that contains the balance sheet, income statement, statement of cash flows, statement of stockholders' equity, and other financial information for analysis. The following table lists descriptions of the major financial statements and reports that a firm publishes. Identify the correct statement or report for each description. Is required by the SEC and includes the audited document that shows the company's financial results for the past year and management's discussion about the future outlook and plans. Income Statement Statement of Stockholders' equity Annual report Balance sheet Statement of cash flows
Annual report The SEC requires a publicly held corporation to publish its financial condition, details of operations, income statements, cash flows, and the amount of equity that the company's stockholders have at the end of each year in an audited and published document called an annual report. The annual report also includes management's analysis of the company's performance, future outlook, and plans. Companies also submit these reports quarterly to the SEC. An income statement—also known as the profit and loss statement—is often divided into operating and non-operating sections and provides a summary of the company's financial performance in terms of revenues and expenses. The income statement helps determine the profitability of the company. It gives information on the earnings before interest, taxes, depreciation, and amortization (EBITDA), which analysts often use to determine the financial strength of a firm. The balance sheet provides a snapshot of a company's assets, liabilities, and stockholders' equity at a given date. It tells the investor how much the company owns and how much it owes. The report is named the balance sheet because the left side (which shows the company's assets) and the right side (which shows the company's liabilities and the shareholders' equity) balance each other. The statement of cash flows provides details about the cash position of a company. Based on operating activities, investing, and financing activities, it breaks down cash inflows and outflows. The statement of stockholders' equity—also known as the statement of owners' equity—outlines the changes in stockholders' equity during the reporting period. It provides details on how much of a firm's common stock is issued or repurchased and how much a firm's earnings are paid as dividends or retained for future investment.
What happened to assets, earnings, dividends, and cash flows during the financial year? Accounting practice in the United States follows the generally accepted accounting principles (GAAP) developed by the Financial Accounting Standards Board (FASB), which is a nongovernmental, professional standards body that monitors accounting practices and evaluates controversial issues. The Securities and Exchange Commission (SEC) requires all publicly traded companies to periodically report their financial information. A publicly held corporation must publish an annual report that contains the balance sheet, income statement, statement of cash flows, statement of stockholders' equity, and other financial information for analysis. The following table lists descriptions of the major financial statements and reports that a firm publishes. Identify the correct statement or report for each description. Summarizes a company's assets, liabilities, and stockholders' equity at a specific point in time. Income Statement Statement of Stockholders' equity Annual report Balance sheet Statement of cash flows
Balance Sheet The SEC requires a publicly held corporation to publish its financial condition, details of operations, income statements, cash flows, and the amount of equity that the company's stockholders have at the end of each year in an audited and published document called an annual report. The annual report also includes management's analysis of the company's performance, future outlook, and plans. Companies also submit these reports quarterly to the SEC. An income statement—also known as the profit and loss statement—is often divided into operating and non-operating sections and provides a summary of the company's financial performance in terms of revenues and expenses. The income statement helps determine the profitability of the company. It gives information on the earnings before interest, taxes, depreciation, and amortization (EBITDA), which analysts often use to determine the financial strength of a firm. The balance sheet provides a snapshot of a company's assets, liabilities, and stockholders' equity at a given date. It tells the investor how much the company owns and how much it owes. The report is named the balance sheet because the left side (which shows the company's assets) and the right side (which shows the company's liabilities and the shareholders' equity) balance each other. The statement of cash flows provides details about the cash position of a company. Based on operating activities, investing, and financing activities, it breaks down cash inflows and outflows. The statement of stockholders' equity—also known as the statement of owners' equity—outlines the changes in stockholders' equity during the reporting period. It provides details on how much of a firm's common stock is issued or repurchased and how much a firm's earnings are paid as dividends or retained for future investment.
Accountants focus on creating financial statements, whereas finance professionals use these statements to evaluate a firm and answer questions about its performance. Indicate which financial statement you would refer to when answering the questions in the following table: Can the firm meet all its short-term obligations using its current assets?
Balance sheet If you want to know whether a firm is generating enough cash to support debt or invest in new products, look at the statement of cash flows. There you will see how much cash the firm generates in a variety of operating, investing, and financing activities. The statement of cash flows also tells you whether the company is generating enough internal funds to support operations or whether new capital needs to be raised. If you want to know how much a company owes to its creditors, look at the balance sheet. The liabilities and equity portion of the balance sheet shows how much debt and equity that the firm has used to finance its assets. To know whether the firm is financed with too much debt, you will need to compare these numbers with industry norms. The balance sheet also tells you how well the firm can meet its short-term obligations (or current liabilities). To see how well it can meet its obligations, compare its current assets to its current liabilities.
The right side of the balance sheet shows the firm's liabilities and stockholders' equity. Which of the following best describes shareholders' equity? Equity is the initial claim on value of the assets before the firm pays off its liabilities. Equity is the difference between the company's assets and liabilities.
Equity is the difference between the company's assets and liabilities. Shareholders' equity is the sum of the amount received from investors in exchange for stock (paid-in capital), any additional capital contributed by investors, and retained earnings accumulated over the life of the company. Shareholders' equity is thus calculated using the following formula: Shareholders' Equity=Paid-in Capital + Retained Earnings Shareholders' equity represents the stake that the owners (stockholders) have in the company. So it can also be defined as a residual of assets after the company pays off its liabilities. Therefore, it is also calculated with this formula: Shareholders' Equity=Total Assets - Total Liabilities
The right side of the balance sheet shows the firm's liabilities and stockholders' equity. Which of the following best describes shareholders' equity? Equity is the difference between the company's assets and retained earnings. Equity is the sum of shareholders' capital provided by shareholders and retained earnings.
Equity is the difference between the company's assets and retained earnings. Shareholders' equity is the sum of the amount received from investors in exchange for stock (paid-in capital), any additional capital contributed by investors, and retained earnings accumulated over the life of the company. Shareholders' equity is thus calculated using the following formula: Shareholders' Equity=Paid-in Capital + Retained Earnings Shareholders' equity represents the stake that the owners (stockholders) have in the company. So it can also be defined as a residual of assets after the company pays off its liabilities. Therefore, it is also calculated with this formula: Shareholders' Equity=Total Assets - Total Liabilities
The right side of the balance sheet shows the firm's liabilities and stockholders' equity. Which of the following best describes shareholders' equity? Equity is the sum of what the initial stockholders paid when they bought company shares and the earnings that the company has retained over the years. Equity is the difference between the paid-in capital and retained earnings.
Equity is the sum of what the initial stockholders paid when they bought company shares and the earnings that the company has retained over the years. Shareholders' equity is the sum of the amount received from investors in exchange for stock (paid-in capital), any additional capital contributed by investors, and retained earnings accumulated over the life of the company. Shareholders' equity is thus calculated using the following formula: Shareholders' Equity=Paid-in Capital + Retained Earnings Shareholders' equity represents the stake that the owners (stockholders) have in the company. So it can also be defined as a residual of assets after the company pays off its liabilities. Therefore, it is also calculated with this formula: Shareholders' Equity=Total Assets - Total Liabilities
Three categories of activities (operating, investing, and financing) generate or use the cash flow in a company. In the following table, identify which type of activity is described by each statement. The Yum chain of restaurants conducts an initial public offering to raise funds for expansion. Operating Activity Investing Activity Financing Activity
Financing Activity Financing activities refers to all cash inflows or outflows made to obtain or repay capital, such as equity and long-term debt. Financing activities include raising capital through initial public offerings, distributing dividends, repurchasing stock, retiring debt, and all other borrowing and related payments. Note that companies may also engage in noncash investing and financing transactions. However, because there is no cash transaction, these activities are not included in the cash flow statements.
Accounting statements represent a company's earnings, but this is not the real cash that a company generates. Earnings data can be manipulated and can be deceiving. Thus, corporate decision makers and security analysts focus on the free cash flow that a firm generates to analyze the company's real cash position. Which of the following statements best describes free cash flow? The amount of a firm's available cash used to write off capital expenditures and depreciation The amount of a firm's available cash that can be used without harming operations or the ability to produce future cash flows
Free cash flow (FCF) is a measure of a company's financial performance and reflects the amount of cash that can be withdrawn from the business without harming company operations or the ability to produce future cash flows. It is also the amount of cash flow remaining after a company makes the asset investments it requires to support its operations, and the amount of cash flow available for distribution to investors. The value of the company is directly related to its ability to generate free cash flow. A firm's FCF is calculated by using the following formula: FCF=EBIT(1 - Tax) + Depreciation - [(Capital Expenditures + Increase in Net Working Capital)]
What happened to assets, earnings, dividends, and cash flows during the financial year? Accounting practice in the United States follows the generally accepted accounting principles (GAAP) developed by the Financial Accounting Standards Board (FASB), which is a nongovernmental, professional standards body that monitors accounting practices and evaluates controversial issues. The Securities and Exchange Commission (SEC) requires all publicly traded companies to periodically report their financial information. A publicly held corporation must publish an annual report that contains the balance sheet, income statement, statement of cash flows, statement of stockholders' equity, and other financial information for analysis. The following table lists descriptions of the major financial statements and reports that a firm publishes. Identify the correct statement or report for each description. Gives details about the firm's sales, costs, and profits for the past accounting period. Income Statement Statement of Stockholders' equity Annual report Balance sheet Statement of cash flows
Income Statement The SEC requires a publicly held corporation to publish its financial condition, details of operations, income statements, cash flows, and the amount of equity that the company's stockholders have at the end of each year in an audited and published document called an annual report. The annual report also includes management's analysis of the company's performance, future outlook, and plans. Companies also submit these reports quarterly to the SEC. An income statement—also known as the profit and loss statement—is often divided into operating and non-operating sections and provides a summary of the company's financial performance in terms of revenues and expenses. The income statement helps determine the profitability of the company. It gives information on the earnings before interest, taxes, depreciation, and amortization (EBITDA), which analysts often use to determine the financial strength of a firm. The balance sheet provides a snapshot of a company's assets, liabilities, and stockholders' equity at a given date. It tells the investor how much the company owns and how much it owes. The report is named the balance sheet because the left side (which shows the company's assets) and the right side (which shows the company's liabilities and the shareholders' equity) balance each other. The statement of cash flows provides details about the cash position of a company. Based on operating activities, investing, and financing activities, it breaks down cash inflows and outflows. The statement of stockholders' equity—also known as the statement of owners' equity—outlines the changes in stockholders' equity during the reporting period. It provides details on how much of a firm's common stock is issued or repurchased and how much a firm's earnings are paid as dividends or retained for future investment.
Three categories of activities (operating, investing, and financing) generate or use the cash flow in a company. In the following table, identify which type of activity is described by each statement. A pharmaceutical company buys marketing rights to sell a drug exclusively in East Asian markets. Operating Activity Investing Activity Financing Activity
Investing Activity All activities related to the purchase or sale of investments by a firm are called investing activities. Expenditures on capital assets, plant and equipment, purchasing marketing rights, short- and long-term investments in equity or bonds and marketable securities are all considered a firm's investments, and cash flows related to these activities are part of investing activities. Note that companies may also engage in noncash investing and financing transactions. However, because there is no cash transaction, these activities are not included in the cash flow statements.
"Cash Is King" for all businesses You can determine a company's cash situation by analyzing the cash flow statement. The cash flow statement also helps determine whether the company (1) is generating enough cash from its operations to make new investments and pay dividends or (2) will need to generate cash by issuing new debt or selling its assets. If a firm has a lot of net cash flow, does that mean the firm's balance sheet cash account must be high? No Yes
No High net cash flow does not always mean that a firm's cash account is high, because the firm may use cash in a variety of ways, including paying dividends, increasing its inventories or accounts receivable, investing in fixed assets, retiring long-term debt, and buying back common stock. If all these factors were held constant, higher net cash flow would probably lead to a higher cash balance. However, this is rarely the case, and these factors have a great impact on a firm's cash account.
Three categories of activities (operating, investing, and financing) generate or use the cash flow in a company. In the following table, identify which type of activity is described by each statement. A company records a decrease in its total raw materials inventory from the previous year. Operating Activity Investing Activity Financing Activity
Operating Activity Operating activities are day-to-day actions needed to conduct business. Operating activities affect a firm's cash position. Cash inflows in the form of revenues from cash sales, inventory sales, collections from accounts receivable, royalties, and commissions are considered operating activities. Cash outflows in the form of payments, disbursements for salaries, bonuses, taxes, purchasing inventory and supplies, servicing short-term financing, and other operating-related expenses are also a part of operating activities. Note that companies may also engage in noncash investing and financing transactions. However, because there is no cash transaction, these activities are not included in the cash flow statements.
Three categories of activities (operating, investing, and financing) generate or use the cash flow in a company. In the following table, identify which type of activity is described by each statement. Fitzi Chemical Co. earns revenue from its cash receipts from royalties. Operating Activity Investing Activity Financing Activity
Operating Activity Operating activities are day-to-day actions needed to conduct business. Operating activities affect a firm's cash position. Cash inflows in the form of revenues from cash sales, inventory sales, collections from accounts receivable, royalties, and commissions are considered operating activities. Cash outflows in the form of payments, disbursements for salaries, bonuses, taxes, purchasing inventory and supplies, servicing short-term financing, and other operating-related expenses are also a part of operating activities. Note that companies may also engage in noncash investing and financing transactions. However, because there is no cash transaction, these activities are not included in the cash flow statements.
If compensation for senior management is based on short-term performance of the firm, in the short run the firm is likely to: overstate its earnings. understate its earnings.
Overstate its earnings If compensation for senior management is based on short-term performance of the firm, in the short run the firm is likely to overstate its earnings. Accountants can use clever accounting practices to boost short-term earnings.
NOW Inc. released its annual results and financial statements. Grace is reading the summary in the business pages of today's paper. In its annual report this year, NOW Inc. reported a net income of $192 million. Last year, the company reported a retained earnings balance of $442 million, whereas this year it increased to $520 million. How much was paid out in dividends this year? $270 million $114 million $3 million $575 million
Retained earnings reported in a company's financial statements refers to the portion of the net income that the company retains rather than distributing as dividends to stockholders. Companies use accumulated retained earnings for reinvestment purposes or to pay debt, which means that the dividends a company pays are the balance of net income left after the company's contribution toward its retained earnings. Thus, dividends paid would be the difference between net income and the contribution to retained earnings. It is calculated as follows: Dividends Paid=Net Income - (Ending Retained Earnings - Beginning Retained Earnings)=$192 - ($520 - $442) million=$114 million The statement of stockholders' equity, or the retained earnings statement, for NOW Inc. would look like this: NOW Inc. Statement of Stockholders' Equity (Millions of dollars) Balance of retained earnings last year$442Add: Net income (this year)$192Less: Dividends paid (this year)$114Balance of retained earnings this year$520 Note that companies can choose not to distribute any dividends for a particular year for various reasons.
Accountants focus on creating financial statements, whereas finance professionals use these statements to evaluate a firm and answer questions about its performance. Indicate which financial statement you would refer to when answering the questions in the following table: Does the firm generate enough internal funds to support anticipated investment, or does additional outside capital need to be raised?
Statement of Cash Flows If you want to know whether a firm is generating enough cash to support debt or invest in new products, look at the statement of cash flows. There you will see how much cash the firm generates in a variety of operating, investing, and financing activities. The statement of cash flows also tells you whether the company is generating enough internal funds to support operations or whether new capital needs to be raised. If you want to know how much a company owes to its creditors, look at the balance sheet. The liabilities and equity portion of the balance sheet shows how much debt and equity that the firm has used to finance its assets. To know whether the firm is financed with too much debt, you will need to compare these numbers with industry norms. The balance sheet also tells you how well the firm can meet its short-term obligations (or current liabilities). To see how well it can meet its obligations, compare its current assets to its current liabilities.
What happened to assets, earnings, dividends, and cash flows during the financial year? Accounting practice in the United States follows the generally accepted accounting principles (GAAP) developed by the Financial Accounting Standards Board (FASB), which is a nongovernmental, professional standards body that monitors accounting practices and evaluates controversial issues. The Securities and Exchange Commission (SEC) requires all publicly traded companies to periodically report their financial information. A publicly held corporation must publish an annual report that contains the balance sheet, income statement, statement of cash flows, statement of stockholders' equity, and other financial information for analysis. The following table lists descriptions of the major financial statements and reports that a firm publishes. Identify the correct statement or report for each description. Details changes in the capital received from investors in exchange for stock (paid-in capital), donated capital, and retained earnings. Income Statement Statement of Stockholders' equity Annual report Balance sheet Statement of cash flows
Statement of Stockholders' equity The SEC requires a publicly held corporation to publish its financial condition, details of operations, income statements, cash flows, and the amount of equity that the company's stockholders have at the end of each year in an audited and published document called an annual report. The annual report also includes management's analysis of the company's performance, future outlook, and plans. Companies also submit these reports quarterly to the SEC. An income statement—also known as the profit and loss statement—is often divided into operating and non-operating sections and provides a summary of the company's financial performance in terms of revenues and expenses. The income statement helps determine the profitability of the company. It gives information on the earnings before interest, taxes, depreciation, and amortization (EBITDA), which analysts often use to determine the financial strength of a firm. The balance sheet provides a snapshot of a company's assets, liabilities, and stockholders' equity at a given date. It tells the investor how much the company owns and how much it owes. The report is named the balance sheet because the left side (which shows the company's assets) and the right side (which shows the company's liabilities and the shareholders' equity) balance each other. The statement of cash flows provides details about the cash position of a company. Based on operating activities, investing, and financing activities, it breaks down cash inflows and outflows. The statement of stockholders' equity—also known as the statement of owners' equity—outlines the changes in stockholders' equity during the reporting period. It provides details on how much of a firm's common stock is issued or repurchased and how much a firm's earnings are paid as dividends or retained for future investment.
What happened to assets, earnings, dividends, and cash flows during the financial year? Accounting practice in the United States follows the generally accepted accounting principles (GAAP) developed by the Financial Accounting Standards Board (FASB), which is a nongovernmental, professional standards body that monitors accounting practices and evaluates controversial issues. The Securities and Exchange Commission (SEC) requires all publicly traded companies to periodically report their financial information. A publicly held corporation must publish an annual report that contains the balance sheet, income statement, statement of cash flows, statement of stockholders' equity, and other financial information for analysis. The following table lists descriptions of the major financial statements and reports that a firm publishes. Identify the correct statement or report for each description. Gives details about the company's cash at the beginning of the year and what is left at the end of the year, including some details about where cash was generated and where it was used during the course of the year. Income Statement Statement of Stockholders' equity Annual report Balance sheet Statement of cash flows
Statement of cash flows The SEC requires a publicly held corporation to publish its financial condition, details of operations, income statements, cash flows, and the amount of equity that the company's stockholders have at the end of each year in an audited and published document called an annual report. The annual report also includes management's analysis of the company's performance, future outlook, and plans. Companies also submit these reports quarterly to the SEC. An income statement—also known as the profit and loss statement—is often divided into operating and non-operating sections and provides a summary of the company's financial performance in terms of revenues and expenses. The income statement helps determine the profitability of the company. It gives information on the earnings before interest, taxes, depreciation, and amortization (EBITDA), which analysts often use to determine the financial strength of a firm. The balance sheet provides a snapshot of a company's assets, liabilities, and stockholders' equity at a given date. It tells the investor how much the company owns and how much it owes. The report is named the balance sheet because the left side (which shows the company's assets) and the right side (which shows the company's liabilities and the shareholders' equity) balance each other. The statement of cash flows provides details about the cash position of a company. Based on operating activities, investing, and financing activities, it breaks down cash inflows and outflows. The statement of stockholders' equity—also known as the statement of owners' equity—outlines the changes in stockholders' equity during the reporting period. It provides details on how much of a firm's common stock is issued or repurchased and how much a firm's earnings are paid as dividends or retained for future investment.
Can a company have negative free cash flow? Yes No
Yes Yes, a company can have a negative free cash flow. It is important to note, however, that negative free cash flow is not bad in itself. A negative free cash flow could imply that a company is making large investments; that is, its investment in long-term assets, called capital expenditure, is a big number that is causing the free cash flow to turn into a negative number. If these capital expenditures earn a high enough return, the investment has the potential to pay off in the long run, which is good for the firm. This is just one possibility, however, because a company may have negative cash flows that are hurting the business. For example, negative cash flows can be caused by operating losses and decreased revenues.
