Opener-in-Review The chapter opener described a company that reported increases in revenues and profits, but even so, the company’s free cash flow was negative. Explain why a profitable, expanding business may have negative free cash flow.

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Answer 1

Textbook Question

Chapter 4, Problem 1OR

Opener-in-Review

The chapter opener described a company that reported increases in revenues and profits, but even so, the company’s free cash flow was negative. Explain why a profitable, expanding business may have negative free cash flow.

Expert Solution & Answer

Summary Introduction

To discuss: Reason for why a profitable growing business may have a negative free cash flow.

Introduction:

Cash flow is the inflow and outflow of cash and capital in a business where, a positive cash flow implies rise in the liquid assets, return on capital to the shareholders and more whereas a negative cash flow includes decreasing in the firm’s liquid assets.

The free cash flow indicates whether the company has adequate cash flow to cover both the operating as well as the fixed and current assets investments.

Explanation of Solution

The free cash flow (FCF) indicates whether the company has adequate cash flow to cover both the operating as well as the fixed and current assets investments as it represents the cash available to investors, creditors or equity owners after all these needs are met.

A firm may have to make additional investments in inventory, fixed assets, receivables etc. when it is expanding and such investments may not be necessarily show up immediatley in the profit calculation eventhough they reduce free cash flow.

When a company needs to make important investment into fixed or working capital higher than operating cash flow; then the firm may be generating high revenue and profit but may not be sufficient to pay creditors or owners. Thus the negative free cash flow may occur when the business is in an expansion phase where high investments is required in fixed asset and current assets to meet the growth requirements.

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Accounting Just because the gross profit margin is positive does not mean that a company will be profitable. So what other factors will impact profitability besides a positive gross profit margin? Do you think that when a company has a good gross profit margin that they are guarantee to earn a net income? Explain

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Answer 2

Textbook Question

Chapter 4, Problem 1OR

Opener-in-Review

The chapter opener described a company that reported increases in revenues and profits, but even so, the company’s free cash flow was negative. Explain why a profitable, expanding business may have negative free cash flow.

Expert Solution & Answer

Summary Introduction

To discuss: Reason for why a profitable growing business may have a negative free cash flow.

Introduction:

Cash flow is the inflow and outflow of cash and capital in a business where, a positive cash flow implies rise in the liquid assets, return on capital to the shareholders and more whereas a negative cash flow includes decreasing in the firm’s liquid assets.

The free cash flow indicates whether the company has adequate cash flow to cover both the operating as well as the fixed and current assets investments.

Explanation of Solution

The free cash flow (FCF) indicates whether the company has adequate cash flow to cover both the operating as well as the fixed and current assets investments as it represents the cash available to investors, creditors or equity owners after all these needs are met.

A firm may have to make additional investments in inventory, fixed assets, receivables etc. when it is expanding and such investments may not be necessarily show up immediatley in the profit calculation eventhough they reduce free cash flow.

When a company needs to make important investment into fixed or working capital higher than operating cash flow; then the firm may be generating high revenue and profit but may not be sufficient to pay creditors or owners. Thus the negative free cash flow may occur when the business is in an expansion phase where high investments is required in fixed asset and current assets to meet the growth requirements.

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Answer 3

Textbook Question

Chapter 4, Problem 1OR

Opener-in-Review

The chapter opener described a company that reported increases in revenues and profits, but even so, the company’s free cash flow was negative. Explain why a profitable, expanding business may have negative free cash flow.

Expert Solution & Answer

Summary Introduction

To discuss: Reason for why a profitable growing business may have a negative free cash flow.

Introduction:

Cash flow is the inflow and outflow of cash and capital in a business where, a positive cash flow implies rise in the liquid assets, return on capital to the shareholders and more whereas a negative cash flow includes decreasing in the firm’s liquid assets.

The free cash flow indicates whether the company has adequate cash flow to cover both the operating as well as the fixed and current assets investments.

Explanation of Solution

The free cash flow (FCF) indicates whether the company has adequate cash flow to cover both the operating as well as the fixed and current assets investments as it represents the cash available to investors, creditors or equity owners after all these needs are met.

A firm may have to make additional investments in inventory, fixed assets, receivables etc. when it is expanding and such investments may not be necessarily show up immediatley in the profit calculation eventhough they reduce free cash flow.

When a company needs to make important investment into fixed or working capital higher than operating cash flow; then the firm may be generating high revenue and profit but may not be sufficient to pay creditors or owners. Thus the negative free cash flow may occur when the business is in an expansion phase where high investments is required in fixed asset and current assets to meet the growth requirements.

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Answer 4

Textbook Question

Chapter 4, Problem 1OR

Opener-in-Review

The chapter opener described a company that reported increases in revenues and profits, but even so, the company’s free cash flow was negative. Explain why a profitable, expanding business may have negative free cash flow.

Expert Solution & Answer

Summary Introduction

To discuss: Reason for why a profitable growing business may have a negative free cash flow.

Introduction:

Cash flow is the inflow and outflow of cash and capital in a business where, a positive cash flow implies rise in the liquid assets, return on capital to the shareholders and more whereas a negative cash flow includes decreasing in the firm’s liquid assets.

The free cash flow indicates whether the company has adequate cash flow to cover both the operating as well as the fixed and current assets investments.

Explanation of Solution

The free cash flow (FCF) indicates whether the company has adequate cash flow to cover both the operating as well as the fixed and current assets investments as it represents the cash available to investors, creditors or equity owners after all these needs are met.

A firm may have to make additional investments in inventory, fixed assets, receivables etc. when it is expanding and such investments may not be necessarily show up immediatley in the profit calculation eventhough they reduce free cash flow.

When a company needs to make important investment into fixed or working capital higher than operating cash flow; then the firm may be generating high revenue and profit but may not be sufficient to pay creditors or owners. Thus the negative free cash flow may occur when the business is in an expansion phase where high investments is required in fixed asset and current assets to meet the growth requirements.

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Answer 5

Textbook Question

Answer 6

Textbook Question

Answer 7

Expert Solution & Answer

Summary Introduction

To discuss: Reason for why a profitable growing business may have a negative free cash flow.

Introduction:

Cash flow is the inflow and outflow of cash and capital in a business where, a positive cash flow implies rise in the liquid assets, return on capital to the shareholders and more whereas a negative cash flow includes decreasing in the firm’s liquid assets.

The free cash flow indicates whether the company has adequate cash flow to cover both the operating as well as the fixed and current assets investments.

Explanation of Solution

The free cash flow (FCF) indicates whether the company has adequate cash flow to cover both the operating as well as the fixed and current assets investments as it represents the cash available to investors, creditors or equity owners after all these needs are met.

A firm may have to make additional investments in inventory, fixed assets, receivables etc. when it is expanding and such investments may not be necessarily show up immediatley in the profit calculation eventhough they reduce free cash flow.

When a company needs to make important investment into fixed or working capital higher than operating cash flow; then the firm may be generating high revenue and profit but may not be sufficient to pay creditors or owners. Thus the negative free cash flow may occur when the business is in an expansion phase where high investments is required in fixed asset and current assets to meet the growth requirements.

Answer 8

Expert Solution & Answer

Summary Introduction

To discuss: Reason for why a profitable growing business may have a negative free cash flow.

Introduction:

Cash flow is the inflow and outflow of cash and capital in a business where, a positive cash flow implies rise in the liquid assets, return on capital to the shareholders and more whereas a negative cash flow includes decreasing in the firm’s liquid assets.

The free cash flow indicates whether the company has adequate cash flow to cover both the operating as well as the fixed and current assets investments.

Explanation of Solution

The free cash flow (FCF) indicates whether the company has adequate cash flow to cover both the operating as well as the fixed and current assets investments as it represents the cash available to investors, creditors or equity owners after all these needs are met.

A firm may have to make additional investments in inventory, fixed assets, receivables etc. when it is expanding and such investments may not be necessarily show up immediatley in the profit calculation eventhough they reduce free cash flow.

When a company needs to make important investment into fixed or working capital higher than operating cash flow; then the firm may be generating high revenue and profit but may not be sufficient to pay creditors or owners. Thus the negative free cash flow may occur when the business is in an expansion phase where high investments is required in fixed asset and current assets to meet the growth requirements.

Answer 9

Expert Solution & Answer

Answer 10

Expert Solution & Answer

Answer 11

Summary Introduction

To discuss: Reason for why a profitable growing business may have a negative free cash flow.

Introduction:

Cash flow is the inflow and outflow of cash and capital in a business where, a positive cash flow implies rise in the liquid assets, return on capital to the shareholders and more whereas a negative cash flow includes decreasing in the firm’s liquid assets.

The free cash flow indicates whether the company has adequate cash flow to cover both the operating as well as the fixed and current assets investments.

Answer 12

Explanation of Solution

The free cash flow (FCF) indicates whether the company has adequate cash flow to cover both the operating as well as the fixed and current assets investments as it represents the cash available to investors, creditors or equity owners after all these needs are met.

A firm may have to make additional investments in inventory, fixed assets, receivables etc. when it is expanding and such investments may not be necessarily show up immediatley in the profit calculation eventhough they reduce free cash flow.

When a company needs to make important investment into fixed or working capital higher than operating cash flow; then the firm may be generating high revenue and profit but may not be sufficient to pay creditors or owners. Thus the negative free cash flow may occur when the business is in an expansion phase where high investments is required in fixed asset and current assets to meet the growth requirements.

Answer 13

Ch. 4.1 - Prob. 4.1RQ Ch. 4.1 - Prob. 4.2RQ Ch. 4.2 - Briefly describe the first four modified...Ch. 4.2 - Describe the overall cash flow through the firm in...Ch. 4.2 - Prob. 4.5RQ Ch. 4.2 - 4-B Why is depreciation (as well as amortization...Ch. 4.2 - Prob. 4.7RQ Ch. 4.2 - Prob. 4.8RQ Ch. 4.2 - Prob. 4.9RQ Ch. 4.3 - Prob. 4.10RQ

Opener-in-Review The chapter opener described a company that reported increases in revenues and profits, but even so, the company’s free cash flow was negative. Explain why a profitable, expanding business may have negative free cash flow.

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