University of Tunis

Tunis Business School

Corporate Finance
Tutorial n°4: Cash Flows and Major financial indicators
Professor: Dr. Ridha ESGHAIER

Multiple Choice Questions:

Q1. Why is the statement of cash flows useful to the analyst?

a. It is the only source in financial statements for learning about cash generation.
b. Focusing on net income can be misleading if a company has a healthy profit, but cannot translate the profit into
cash.
c. The statement of cash flows reveals why a company was able to generate a profit.
d. It shows the impact of firm’s activities on its cash and cash equivalent
e. It shows how the firm’s cash inflows and outflows are computed

Q2. A 'strong' statement of cash flows would show that the major sources of cash came from which of the
following?
a. Investing activities
b. Operating activities
c. Financing activities
d. Owners
e. Debt-holders

Q3. For a profitable firm, total sources of funds will always total uses of funds.
a. be equal to
b. be greater than
c. be less than
d. be greater than or equal
e. have no consistent relationship to

Q4. Which of the following statements is correct?

a. When the income statement shows net income of $1,000, this means that cash on the balance sheet will increase
by $1,000
b. Free Cash Flow to the Firm is the amount of cash available from operations for distribution to all investors after
making the necessary investments to support operations.
c. the economic value added (EVA) represents the residual income that remains after the cost of debt has been
deducted
d. For a change in assets (other than cash), the change in the Cash account is in the opposite direction.
e. For a change in liabilities and owner's equity, the change in the Cash account is in the same direction.

Q5. Which of the following statements is NOT correct?

a. cash flow to stockholders is dividends paid less net new equity raised
b. Cash flow to creditors is interest paid less net new borrowing
c. Free cash flow to equity is the cash flow available to the company’s holders of common equity after all operating
expenses, interest, and principal payments have been paid and necessary investments in working and fixed capital
have been made
d. in general if two companies have different amounts of debt, hence different interest charges, they could have
identical operating performances but different net incomes.
e. A negative free cash flow is always a bad sign

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 Q6. Last year, a company had positive net cash flow (Net income + depreciation), yet cash on the balance sheet
decreased. Which of the following could explain the company’s financial performance?
a. The company issued new common stock.
b. The company issued new long-term debt.
c. The company sold off some of its assets.
d. The company purchased a lot of new fixed assets.
e. The company eliminated its dividend.

Q7. A company recently announced an increase in its net income, yet its net cash flow declined relative to last year.
Which of the following could explain this performance?
a. The company’s interest expense increased.
b. The company’s depreciation and amortization expenses declined.
c. The company’s operating income declined.
d. All of the statements above are correct.
e. None of the statements above is correct.

Q8. A stock analyst has acquired the following information for a firm:
Retained earnings on the year-end (n-1) balance sheet was $700,000.
Retained earnings on the year-end (n) balance sheet was $320,000.
The company does not pay dividends.
The company’s depreciation expense is its only non-cash expense.
The company has no non-cash revenues.
The company’s net cash flow for year (n) was $150,000.
On the basis of this information, which of the following statements is most correct?
a. the firm had negative net income in year (n).
b. the firm had positive net income in year (n), but it was less than its net income in year (n-1).
c. the firm’s depreciation expense in year (n) was less than $150,000.
d. the firm’s cash on the balance sheet at the end of year (n) must be lower than the cash it had on its balance sheet at
the end of year (n-1).
e. the firm’s net cash flow in year (n) must be higher than its net cash flow in year (n-1).

EXERCISES:
Exercise n°1. Economic Value Added (EVA)
A Company recently reported the following information:
- Net income = $600,000.
- Tax rate = 40%.
- Interest expense = $200,000.
- Total investor-supplied operating capital employed = $9 million.
- After-tax cost of capital = 10%.
What is the company's EVA?

Exercise n°2. Cash flows from operating activities

A firm had $55,000 in cash at year-end 2018 and $25,000 in cash at year-end 2019. Cash flow from long-term
investing activities totaled -$250,000, and cash flow from financing activities totaled $170,000.
a. What was the cash flow from operating activities?
b. If accruals increased by $25,000, receivables and inventories increased by $100,000, and depreciation and
amortization totaled $10,000, what was the firm’s net income?

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 Exercise n°3. Cash flows from financing activities:

A firm had $1,788,000 in cash at year-end 2018 and $2,098,000 in cash at year-end 2019. Its cash flow
from operating activities totaled $532,700 and its cash flow from long-term investing activities totaled (-
$1,233,000).
a. What was the firm’s cash flow from financing activities?
b. If long term debt increased by $521,000, payables decreases by $27,700, the company issued $436,000
of common stocks and $120,000 of preferred stocks, what was the amount of dividend paid by the
company during the year 2019?

Exercise 4. CF statement and Free cash flow

Financial information for a Corporation is shown here:

Income Statements for Year Ending December 31 (Millions of Dollars)

n n-1

Sales $ 1,200 $1,000

Operating costs excluding Dep.
and amortization $ 1,020 $ 850
EBITDA $ 180 $ 150
Depreciation and amortization $ 30.0 $ 25
EBIT $ 150 $ 125
Interest $ 21.7 $ 20.2
Earnings before taxes $ 128.3 $ 104.8
Taxes (40%) $ 51.3 $ 41.9
Net income $ 76.98 $ 62.9
Common dividends $ 60.48 $ 46.4
Stock Price $ 7.60 $ 5.80

Balance Sheets as of December 31 (Millions of Dollars)

n n-1 n n-1
Assets Liabilities and Equity
Cash and equivalents $ 12 $ 10
S-T investments $ 11 $ 23 Accounts payable $ 108 $ 90
Accounts receivable $ 180 $ 150 Notes payable $ 78 $ 74.5
Inventories $ 180 $ 200 Accruals $ 72 $ 60
Total current assets $ 383 $ 383 Total current liabilities $ 258 $ 224.5
Gross plant and equipment $ 677 $ 551.5 Long-term bonds $ 150 $ 150
Accumulated Depreciation (130) (100) Total debt $ 397 $ 351.5
Net plant and Equipment $ 547 $ 451.5 Common stock (50 million shares) $ 50 $ 50
Total assets $ 930 $ 834.5 Retained earnings ? $ 208.5
Common equity $ 275 $ 258.5
Total liabilities and equity $ 930 $ 834.5
Part1:
a. Using the Retained earnings statement calculate the retained earnings in year n
b. Compute the cash flow from operating activities
c. Determine the cash flow from investing activities
d. What is the cash flow from financing activities
e. What is the Net change in cash (using the answers in b, c and d)?

Part2:
a. What was the year n NOPAT?
b. What were the year n-1 and year n net operating working capital?
c. What were the year n-1 and year n total net operating capital?
d. What was the year n free cash flow to the firm?
e. What was the year n free cash flow to Equity? The free cash flow to Equity year n-1 was $24.2M.
f. How would you explain the large increase in year n dividends?
j. Calculate the Market Value Added (MVA) in year n
h. If the WACC of the firm is 8.25%, calculate its Economic Value added (EVA) in year n
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 Exercise 5: FCFF and FCFE

Indicate the effect on this period’s FCFF and FCFE of a change in each of the items listed here. Assume a
$100 increase in each case and a 40% tax rate.

A Net income.
B Cash operating expenses.
C Depreciation.
D Interest expense.
E EBIT.
F Accounts receivable.
G Accounts payable.
H Property, plant, and equipment.
I Notes payable.
J Cash dividends paid.
K Proceeds from issuing new common shares.
L Common shares repurchased.

Exercise 6 : FCFF, FCFE, CF to creditors, CF to shareholders and CF identity

1. Using information from the company’s financial statements given below construct its cash flow statement
2. Show the adjustments to net income that would be required to find:
a. FCFF.
b. FCFE.
c. Show the adjustments to FCFF that would result in FCFE.
3. Show the adjustments from the current levels of CFO (which is $427 million), EBIT ($605 million), and
EBITDA ($785 million) to find:
a. FCFF.
b. FCFE.
4. Compute the cash flow to creditors and the cash flow to shareholders and check for the cash flow identity

31 December (n)

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(n-1) (n)

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