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.

Question

Want to see more full solutions like this?

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.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Students have asked these similar questions

The Fortune Company is considering a new investment. Financial projections for the investment are tabulated below. The corporate tax rate is 24 percent. Assume all sales revenue is received in cash, all operating costs and income taxes are paid in cash, and all cash flows occur at the end of the year. All net working capital is recovered at the end of the project. Year 0 Year 1 Year 2 Year 3 Year 4 Investment $ 28,000 Sales revenue $ 14,500 $ 15,000 $ 15,500 $ 12,500 Operating costs 3,100 3,200 3,300 2,500 Depreciation 7,000 7,000 7,000 7,000 Net working capital spending 340 390 440 340 ?

What are the six types of alternative case study compositional structures (formats)used for research purposes, such as: 1. Linear-Analytical, 2. Comparative, 3. Chronological, 4. Theory Building, 5. Suspense and 6. Unsequenced. Please explain

For an operating lease, substantially all the risks and rewards of ownership remain with the _________. QuestFor an operating lease, substantially all the risks and rewards of ownership remain with the _________: A) Tenant b) Lessee lessor none of the above tenant lessee lessor none of the aboveLeasing allows the _________ to acquire the use of a needed asset without having to make the large up-front payment that purchase agreements require Question 4 options: lessor lessee landlord none of the above

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.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

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.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

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.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

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 - Briefly describe the first four modified...Ch. 4.1 - Describe the overall cash flow through the firm in...Ch. 4.1 - Prob. 4.3RQ Ch. 4.1 - 4-B Why is depreciation (as well as amortization...Ch. 4.1 - Prob. 4.5RQ Ch. 4.1 - Prob. 4.6RQ Ch. 4.1 - 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.

Videos

Explanation of Solution

Want to see more full solutions like this?

Chapter 4 Solutions