Reading 34: Understanding the Cash Flow Statement LOS h习题精 border, period, equipment, face, 2010

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LOS h, (Part 1): Explain and calculate free cash flow to the firm and free cash flow to equity.

The RR Corporation had cash flow from operations of $20 million. RR purchased $5 million in equipment and sold $3 million of equipment during the period. What is RR's free cash flow to equity for the period?

A) $18 million.

B) $15 million.

C) $22 million.

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Free cash flow to equity (FCFE) is generally defined as cash flow from operations (CFO) less net fixed capital expenditures plus net borrowing. No information on borrowing is given here, so FCFE = 20 ? (5 ? 3) = $18 million.

 

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LOS h, (Part 2): Explain and calculate other cash flow ratios。

Which of the following best describes a ratio that measures a firm’s ability to acquire long-term assets with cash flows from operations, and a performance ratio, respectively?

Acquire assets with CFO

Performance ratio

A) Investing and financing ratio Cash-to-income ratio

B) Reinvestment ratio Cash-to-income ratio

C) Reinvestment ratio Debt payment ratio

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The reinvestment ratio measures a firm’s ability to acquire long-term assets with cash flows from operations. In contrast, the investing and financing ratio, which is more comprehensive, measures the firm’s ability to purchase assets, satisfy debts, and pay dividends.

The cash-to-income ratio measures the ability to generate cash from a firm’s operations and is a performance ratio for cash flow analysis purposes. The debt payment ratio measures the firm’s ability to satisfy long-term debt with cash flow from operations but it is more of a coverage ratio than a performance ratio.

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