Accounting

691 Words3 Pages
Chemalite Inc. B 3. In analyzing the cash flows from Chemalite using both the direct and indirect methods, one can see similar patterns in the where the uses of cash is directed. The money in both methods is going towards the company itself and funds necessary to make sure it stays afloat. The main source of the cash inflow is from the sale of Chemalite. The sale from 1991 brought in a total of $754,000 and 1992 brought in a total of $1,886,250. A sales increase of about 250% is very impressive for one year is responsible for bringing in the majority of cash for Chemalite Inc. Cash outflow is a slightly different case. Cash outflow for Chemalite is mostly going back into the company itself for the sake of growth. Growth in the cash flow…show more content…
Chemalite Inc. is not firm as large as Google, Microsoft, or Apple so they cannot afford to finance the company through their equity with retained earnings. If he were to relay a message to the stock holders, it would be suggested that he state that financing the company through debt is a good way of maximizing their investment in assets. Without debt, the company’s assets will not be as large. A simple explanation would be as such; Firm A has the opportunity to invest $500,000 of borrowed money to make $1,000,000 in revenue. What is the rational choice? The rational choice in that case would be to borrow. Leveraging Chemalite Inc. correctly can make room for growth, leading to higher stock prices thus leading to the potential for higher dividend payments. A big recommendation to Bennett Alexander is to highlight that point because stockholders would be delighted to hear it. They want to know when their investment is paying them back, literally. Chemalite Inc. should balance their use of debt with their equity to finance the company well. If they don’t use debt and use their equity, it poses a greater risk to shareholders. If there’s nothing left if the company goes under the shareholders get nothing. If Bennett Alexander is still concerned about the level of current debt, he would be advised to invest more in long term debt. Instead of being pressured to pay off all the debt within that year it would be better to spread it out over a number of
Open Document