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    Course Code: Fn-550

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    No, negative free cash flow is not always a bad sign. It could indicate that a company is reinvesting cash back into the business to fund growth opportunities that are expected to generate positive cash flows in the future. As long as the capital expenditures are generating returns that exceed their costs, negative free cash flow can be acceptable, especially for growing companies. It is important to look at trends and prospects over time rather than any single period.

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    No, negative free cash flow is not always a bad sign. It could indicate that a company is reinvesting cash back into the business to fund growth opportunities that are expected to generate positive cash flows in the future. As long as the capital expenditures are generating returns that exceed their costs, negative free cash flow can be acceptable, especially for growing companies. It is important to look at trends and prospects over time rather than any single period.

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    FM09-10

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    No, negative free cash flow is not always a bad sign. It could indicate that a company is reinvesting cash back into the business to fund growth opportunities that are expected to generate positive cash flows in the future. As long as the capital expenditures are generating returns that exceed their costs, negative free cash flow can be acceptable, especially for growing companies. It is important to look at trends and prospects over time rather than any single period.

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    58 views25 pages

    Course Code: Fn-550

    Uploaded by

    shoaibraza110
    No, negative free cash flow is not always a bad sign. It could indicate that a company is reinvesting cash back into the business to fund growth opportunities that are expected to generate positive cash flows in the future. As long as the capital expenditures are generating returns that exceed their costs, negative free cash flow can be acceptable, especially for growing companies. It is important to look at trends and prospects over time rather than any single period.

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    FINANCIAL

    MANAGEMENT

    COURSE CODE: FN-550


    Finance:
    The science of the management of money and
    other assets.
    The management of money, banking,
    investments, and credit.
    Money resources of state, company or person.
    Management:
    Utilization of available resources for the
    accomplishment of objective and/or goal.
    The act, manner, or practice of managing;
    handling, supervision, or control.
    Financial Assets
    -Are claims to the income generated by real
    assets. Also called securities.
     Financial Management:
    -The management of the finances of a business /
    organization in order to achieve financial
    objectives.
    The Role of Financial Management
    - To carry on business, companies need an
    almost endless variety of real assets (assets used
    to produce goods and services). They are
    tangible (machinery, factories, office etc.) /
    intangible ( technical expertise, trade mark etc.).
    -To obtain the necessary money, the company
    sells financial assets or services, to investors.
    An Overview of Financial Management
     Career Opportunities
     Issues of the New Millennium
     Forms of Businesses
     Goals of the Corporation
     Agency Relationships
    Career Opportunities in Finance
    •Money and capital markets
    •Investments
    Responsibility of the Financial Staff

    Maximize stock value by:

    • Forecasting and planning


    • Investment and financing decisions
    • Coordination and control
    • Transactions in the financial markets
    • Managing risk
    Role of Finance in a Typical Business
    Organization
    Financial Management Issues of the New
    Millennium
    •The effect of changing technology
    •The globalization of business
    •Law & order situation
    Alternative Forms of Business Organization
    •Sole proprietorship
    •Partnership
    •Private Limited
    •Public Limited
    •Corporation
    Sole proprietorships & Partnerships
    Advantages
    - Ease of formation
    - Subject to few regulations
    - No corporate income taxes
    Disadvantages
    - Difficult to raise capital
    - Unlimited liability
    - Limited life
    Private Limited/ Public Limited/
    Corporation
    Advantages
    - Unlimited life
    -
    - Limited liability
    - Ease of raising capital
    Disadvantages
    - Double taxation
    - Cost of set-up and report filing
    Financial Goals of the Corporation
    The primary financial goal is shareholder wealth
    maximization, which translates to maximizing
    stock price.
    - Do firms have any responsibilities to society
    at large?
    - Is stock price maximization good or bad for
    society?
    - Should firms behave ethically?
    Is stock price maximization the same as profit
    maximization?

    -No, despite a generally high correlation


    amongst stock price, EPS, and cash flow.
    -Current stock price relies upon current
    earnings, as well as future earnings and cash
    flow.
    -Some actions may cause an increase in
    earnings, yet cause the stock price to decrease
    (and vice versa).
    Agency relationships
    -An agency relationship exists whenever a
    principal hires an agent to act on their behalf.
    -Within a corporation, agency relationships exist
    between:
    - Shareholders and managers
    - Shareholders and creditors
    Shareholders versus Managers
    - Managers are naturally inclined to act in their
    own best interests.
    But the following factors affect managerial
    behavior:
    - Managerial compensation plans
    - Direct intervention by shareholders
    - The threat of firing
    - The threat of takeover

    Shareholders versus Creditors


    -Shareholders (through managers) could take
    actions to maximize stock price that are
    detrimental to creditors.
    -In the long run, such actions will raise the cost
    of debt and ultimately lower stock price.
    Financial Statements, Cash Flow, and Taxes
     Balance sheet
     Income statement
     Statement of cash flows
     Accounting income vs. cash flow
     MVA and EVA
     Federal tax system
    The Annual Report
    Balance sheet – provides a snapshot of a firm’s
    financial position at one point in time.
    Income statement – summarizes a firm’s
    revenues and expenses over a given period of
    time.
    Statement of retained earnings – shows how
    much of the firm’s earnings were retained, rather
    than paid out as dividends.
    Statement of cash flows – reports the impact of
    a firm’s activities on cash flows over a given
    period of time.
    Balance Sheet:
    Assets
    Amount rupee in 000

    2009 2008
    Cash 7,282
    57,600
    A/R 632,160
    351,200
    Inventories 1,287,360
    715,200
    Total CA 1,926,8021,124,000
    Gross FA 491,000
    1,202,950
    Less: Dep. 146,200
    263,160
    Net FA 344,800
    939,790
    Total Assets 2,866,592
    1,468,800
    Balance Sheet:
    Liabilities and Equity
    Amount rupee in 000
    2009 2008
    Accts payable 524,160 145,600
    Notes payable 636,808 200,000
    Accruals 489,600 136,000
    Total CL 1,650,568 481,600
    Long-term debt 723,432 323,432
    Common stock 460,000 460,000
    Retained earnings 32,592 203,768
    Total Equity 492,592 663,768
    Total L & E 2,866,592 1,468,800
    Income statement
    Amount rupee in ooo

    2009 2008
    Sales 6,034,000 3,432,000
    COGS 5,528,000 2,864,000
    Other expenses 519,988 358,672
    EBITDA (13,988) 209,328
    Depr. & Amort. 116,960 18,900
    EBIT (130,948) 190,428
    Interest Exp. 136,012 43,828
    EBT (266,960) 146,600
    Taxes (106,784) 58,640
    Net income (160,176) 87,960
    Other data
    2009 2008
    No. of shares 100,000,000 100,000,000
    EPS -Rs.1.602 Rs.0.88
    DPS Rs.0.11 Rs.0.22
    Stock price Rs.2.25 Rs.8.50
    Lease pmts Rs.40,000 Rs.40,000

    Statement of Retained Earnings (2009)


    Amount rupee in 000

    Balance of retained earnings, 12/31/08 Rs.203,768


    Add: Net income, 2009 (160,176)
    Less: Dividends paid (11,000)
    Balance of retained
    earnings, 12/31/09 Rs.32,592
    Statement of Cash Flows (2009)
    Amount rupee in 000
    OPERATING ACTIVITIES
    Net income (160,176)
    Add (Sources of cash):
    Depreciation 116,960
    Increase in A/P 378,560
    Increase in accruals 353,600
    Subtract (Uses of cash):
    Increase in A/R (280,960)
    Increase in inventories (572,160)
    Net cash provided by ops. (164,176)
    L-T INVESTING ACTIVITIES
    Investment in fixed assets (711,950)
    FINANCING ACTIVITIES
    Increase in notes payable 436,808
    Increase in long-term debt 400,000
    Payment of cash dividend (11,000)
    Net cash from financing 825,808
    NET CHANGE IN CASH (50,318)
    Plus: Cash at beginning of year 57,600
    Cash at end of year 7,282
    What can you conclude about D’Leon’s financial
    condition from its statement of CFs?
    •Net cash from operations = -Rs.164,176,000/-,
    mainly because of negative NI.
    •The firm borrowed Rs.825,808,000/- to meet its cash
    requirements.
    •Even after borrowing, the cash account fell by
    Rs.50,318,000/-
    Did the expansion create additional net operating
    after taxes (NOPAT)?
    NOPAT = EBIT (1 – Tax rate)
    NOPAT09 = -Rs.130,948,000(1 – 0.4)
    = -Rs.130,948,000(0.6)
    = -Rs.78,569,000/-
    NOPAT08 = Rs.114,257,000/-
    What effect did the expansion have on net
    operating working capital? Amount in 000

    NOWC = Current - Non-interest


    assets bearing CL

    NOWC09 = (Rs.7,282 + Rs.632,160 + Rs.1,287,360)


    NOWC08 = $842,400
    What effect did the expansion have on operating
    capital? Amount rupee in 000
    Operating capital = NOWC + Net Fixed Assets
    Operating Capital09 = Rs.913,042 + Rs.939,790
    = Rs.1,852,832
    Operating Capital08 = Rs.1,187,200
    What is your assessment of the expansion’s effect
    on operations?
    2009 (000) 2008 (000)
    Sales Rs.6,034,000 Rs.3,432,000
    NOPAT -Rs.78,569 Rs.114,257
    NOWC Rs.913,042 Rs.842,400
    Net Income -Rs.160,176 Rs.87,960
    What effect did the expansion have on net cash
    flow and operating cash flow? Amount in 000
    NCF09 = NI + Dep = (Rs.160,176) + Rs.116,960
    = -Rs.43,216
    NCF08 = Rs.87,960 + Rs.18,900 = Rs.106,860
    OCF09 = NOPAT + Dep
    = (Rs.78,569) + Rs.116,960
    = Rs.38,391
    OCF08 = Rs.114,257 + Rs.18,900
    = Rs.133,157
    What was the free cash flow (FCF) for 2009?
    FCF = OCF – Gross capital investment
    - OR -
    FCF09 = NOPAT – Net Operating capital investment
    = -Rs.78,569 – (Rs.1,852,832 –
    Rs.1,187,200)
    = -Rs.744,201

    Is negative free cash flow always a bad sign?

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