Financial Cash Flow And Statement Of Cash Flows

Financial Cash Flow And Statement Of Cash Flows 10 Credits You Are R

Financial cash flow and statement of cash flows (10 credits) You are researching Time Manufacturing and have found the following accounting statement of cash flows for the most recent year. You also know that the company paid $84 million in current taxes and had an interest expense of $41 million. Statement of cash flows (units: million): Operation net income 192; depreciation 76; deferred taxes 13; change in assets and liabilities: accounts receivable -16, inventories 17, accounts payable 13, accrued expenses -7, other 2; total cash flow from operation 290; investing activities: acquisition of fixed assets -198; sale of fixed assets 21; total cash flow from investing activities -177; financing activities: retirement of long-term debt -150; proceeds from long-term debt sales 115; change in notes payable 8; dividends -81; repurchase of stock -11; proceeds from new stock issue 43; total cash flow from financing activities -76; change in cash (balance sheet). Use this information above: interest expenses, current tax, and statement of cash flow to compute financial cash flow (5 credits). (Hint: first calculate cash flows from the three parts and then sum them) (2) Based on the statement of cash flow, please calculate the cash flow for shareholders and cash flow for debtholders. Based on the calculation, write down the equation about cash flow for different stakeholders. (5 credits) -->

Paper For Above instruction

Introduction

The analysis of cash flows is fundamental in understanding a company's financial health and the distribution of cash among stakeholders, including shareholders and debtholders. Cash flow statements provide insights into the company's operational efficiency, investment activities, and financing strategies. This paper focuses on calculating the financial cash flow of Time Manufacturing, interpreting cash flows for shareholders and debtholders, and understanding their respective roles in the company's financial ecosystem using the provided data.

Part 1: Calculating Financial Cash Flow

The initial step involves dissecting the statement of cash flows into its core components: operating, investing, and financing activities. We are given the net income, depreciation, deferred taxes, and changes in assets and liabilities. Additionally, the company's tax payments and interest expenses are specified. To compute the financial cash flow, we consider cash flows from operations, investment, and financing, along with adjustments for taxes and interest.

Cash Flows from Operating Activities

The net cash flow from operations is directly provided as $290 million. This figure incorporates net income and adjustments for non-cash items such as depreciation and deferred taxes, as well as changes in working capital components like accounts receivable, inventories, accounts payable, and accrued expenses.

Cash Flows from Investing Activities

Investing cash flows are derived from the acquisition and sale of fixed assets. The company spent $198 million on acquiring fixed assets and received $21 million from their sale, resulting in a net cash outflow of $177 million from investing activities.

Cash Flows from Financing Activities

Financing cash flows include debt activities and equity transactions. The company retired long-term debt worth $150 million, issued new debt worth $115 million, and increased notes payable by $8 million. Dividends paid totaled $81 million, and the company repurchased stock for $11 million while issuing new stock worth $43 million. Summing these gives a net cash outflow of $76 million from financing activities.

Calculating Financial Cash Flow

Financial cash flow focuses on cash flows related to debt and equity financing, excluding operational and investing activities. It is computed as:

Financial Cash Flow = Changes in debt (net of interest and taxes) + Equity transactions (issuances, repurchases, dividends).

Since interest expense is $41 million and current taxes paid are $84 million, adjustments are necessary to derive the after-tax interest cash flow:

- Interest after tax: Interest expense x (1 - tax rate).

Assuming for simplicity that the tax rate is the proportion of taxes paid to interest expenses:

Tax rate = Taxes / (Interest expense + other relevant income/expenses). Given limited data, approximate tax rate as taxes relative to interest.

Tax rate ≈ $84 million / ($84 million + $41 million) ≈ 0.672 or 67.2%.

Interest after tax = $41 million x (1 - 0.672) ≈ $13.55 million.

Total cash flow from financing, focusing on debt, is:

Net debt change = (Retirement of debt + new debt proceeds + change in notes payable)

= -$150M + $115M + $8M = -$27M.

Adjusting for interest paid:

Interest paid (cash outflow) = $41 million.

Thus, the company's financing cash flow related to debt is approximately:

Financing cash flow = Net debt change + interest paid

= -$27 million + $41 million = $14 million.

However, since this includes both debt and interest, the core financial cash flow (excluding operational cash flows) is approximately $14 million.

Part 2: Cash Flows for Shareholders and Debtholders

Shareholders' cash flows predominantly consist of dividends and share repurchases, minus equity proceeds. Debtholders' cash flows are largely linked to interest payments and debt repayment.

- Cash flow to shareholders:

Dividends paid: $81 million

Repurchase of stock: $11 million

Proceeds from new stock issued: $43 million

Thus,

Cash flow to shareholders = Dividends + Repurchase - Stock issuance

= $81 million + $11 million - $43 million

= $49 million (net outflow).

- Cash flow to debtholders:

Debtholders receive interest payments ($41 million), and the debt principal decreases by the amount of debt retired ($150 million). The proceeds from debt issuance offset part of debt repayments.

Net cash flow to debt holders:

= Interest paid + Debt issued - Debt retired

= $41 million + $115 million - $150 million

= $6 million net inflow.

Equations:

- Cash flow to Shareholders = Dividends + Stock repurchase - Stock issuance.

- Cash flow to Debtholders = Interest payments + New debt proceeds - Debt redemptions.

These equations highlight the distinct cash movement patterns for each stakeholder group, illustrating the company's allocation priorities and financial strategy.

Conclusion

The analysis demonstrates how cash flows from operating, investing, and financing activities contribute to understanding a firm's financial standing. Calculations of financial cash flow, and cash flows specifically for shareholders and debtholders, reveal the company's commitments to debt repayment, interest obligations, dividend payouts, and equity financing. Such insights are vital for investors, creditors, and management to evaluate the company's liquidity, solvency, and strategic focus. Proper interpretation of these cash flow figures ensures better decision-making aligned with the firm's long-term financial health.

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