STATEMENT OF CASHFLOWS Case Solution & Answer

STATEMENT OF CASHFLOWS Case Solution

The difference between these two figures were created by depreciation. Apart from depreciation, the addition of restructuring and other usual items also played a great role in creating a difference between net cash flows from operations and net loss.

 WAS THE FIRM ABLE TO GENERATE ENOUGH CASH FLOWS FROM ITS OPERATION TO PAY FOR ALL OF ITS CAPITAL EXPENDITURE?

Alpha Company in three years from 1989 to 1991,  did not  have enough cash flows to support their capital expenditure. In the year 1989, they only generated cash flows, which were 12.89% of total capital expenditure requirement.

In 1990, they improved their cash flows but only generated 40% cash flows of total capital expenditure requirement. In the year 1991, although they saw further improvement in the cash flow generation, they only managed to generate 70% of total capital expenditure requirement. Which was better than two preceding years.

In the years 1989 and 1990, Beta Company was able to generate sufficient funds to support capital expenditure. Beta generated excess funds to pay for capital expenditure. In the year 1991, the company generated only 64% of total capital expenditure requirement. It appears that it can only pay 64% of capital expenditure from net cash flows generated from operations.

Gamma Company generated excess cash from operations in three consecutive years from 1989 to 1991 the percentages of generated funds are 141% 131% and 129.3%. In 1989 they had sufficient funds to pay for capital expenditures.

DID THE CASE FLOWS FROM OPERATIONS COVER BOTH THE CAPITAL EXPENDITURE AND THE FIRM’S DIVIDEND PAYMENTS?

Only the Alpha Company paid the dividends in the year 1989 and 1990. The cash flows generated from operating activities are only 39.74% and 12% of total capital expenditure and dividend payments. Which means that in 1990, Alpha had to externally finance 60% of proceeds. In 1989, the total of 88% proceeds for the payment of capital expenditure and dividends. Otherwise, apart from operating activities the total funds generated by Alpha Company in the year 1989, 1990 and 1991 were 174.6, 265.7 and 369.3 million

			ALPHA COMPANY
Â			Year Ended June 30,
Â			1991	1990	1989
Â
NET CASH OPERATING ACTIVITY			125.2	89.3	46.8
Proceeds from long-term debt			44.4	167.7	305
Proceeds from sale of Class B common stock			5.0	8.7	17.5
Proceeds from the issuance of common stock
Proceeds from issuance of debt
Issuance of treasury shares, including tax benefits
CASH FROM OPERATIONS			174.6	265.7	369.3

HOW DID THE FIRM INVESTED ITS EXCESS CASH

It appears that Alpha Company had excess cash in the years 1990 and 1991, which they considerably utilized in repayment of loans. In the year 1989, they had negative figures instead of excess cash.

On the other hand, Beta Company had excess cash for three consecutive years, which they invested in the repaying amounts related to line of credit and increase in assets.

Lastly, Gamma Company is also had excess cash in all the years after deducting capital expenditure from the proceeds raised through different channels. It appears that they invested in form of purchase of treasury shares and repayment of long-term debt. They also purchased one business in the year 1991, where they made heavy investments.

 IF NOT WHAT WERE THE SOURCES OF CASH THE FIRM USED TO PAY FOR THE CAPITAL EXPENDITURE AND DIVIDEND PAYMENT.

In case of Alpha, payments of dividends and capital expenditure were made through funds generated by their operating activities. Although not entirely, but up to some extent they have managed internally to make those payments. The other two companies didn’t pay any dividends in any of the years. The cash generated by the firms through operating activities were sufficient to pay for any dividends……………

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