Question: A financial analyst has forecasted 2017 financial statement of firms A, B, C and D and used them to make these cash flow estimates:
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Firm A
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Firm B
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Firm C
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Firm D
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Cash Flow to Bondholders, CF(B):
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$ 6m
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$ 3m
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$ 5m
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Cash Flow from Net Capital Spending, CF(NCS):
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$15m
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$30m
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$10m
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$10m
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Cash Flow from Normal Operations, CF(NO):
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$ 7m
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$20m
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$ 5m
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$50m
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Cash Flow to Stockholders, CF(S):
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$ 2m
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$15m
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$18m
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$35m
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1. Which of the following statements is most accurate?
a. Firms A and C are both growing firms.
b. Firms B and C are both failing firms.
c. Firm D is downsizing.
d. Firm A is probably not profitable.
2. At Firm D suppose that Cash Flow to Bondholders is larger, $15m instead of $5m. Which of the following statements is most accurate?
a. If Free Cash Flow is fixed, Cash Flow to Stockholders must be larger.
b. If Cash Flow to Stockholders is fixed, Cash Flow from Normal Operations must be larger and/or Cash Flow from Net Capital Spending must be larger (i.e., less negative).
c. If Cash Flow from Net Capital Spending is smaller (i.e., more negative), Cash Flow from Normal Operations must be larger and/or Cash Flow to Stockholders must be larger.
d. If Cash Flow from Normal Operations is fixed, Cash Flow from Net Capital Spending must be smaller (i.e., more negative) and/or Cash Flow to Stockholders must be smaller.