Corporate Finance - Concept Questions


3)Working Capital
: Working Capital is considering what the best way would be in terms of a management for short-term resources and obligations. The concept of this decision focuses on if it is possible to maintain enough capital for payments of its bills including and extra money earned as interest. Current assets and current liabilities are considered as the part of this decision.

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Complete the following exercises and problems from the textbook. Some problems ask multiple questions; be sure to answer every part of the exercise or problem unless otherwise noted

Why is it necessary to use comparative balance sheets, a current income statement, and certain transaction data in preparing a statement of cash flows?

Therefore, if net working capital increases, this is an offset to cash flow from operations, whereas if net

Even though most of these expenses are not of big magnitude their value can add up and affect the company’s finances. Some of these items are accrued time for employees, bonuses, benefits, utilities, improvements and taxes. Some additional sources of working capital include; cash reserves, profits, equity loans, line of credit, and long term loans.

The cash flow statement shows the amount of cash within a company. Items that affect the cash balance are listed on the statement. The first section of the cash flow statement is operating activities, which shows the cash flowing in and out of the company in relation to its business operation. The operating activities section also includes net income and the change in dollars of certain accounts listed on the balance sheet. The next section, investing activities, shows cash the company received and spent on a company's capital investments. The financing activities section shows the inflows and outflows of cash related to the company’s issued financial securities, which is also listed on the balance sheet and statement of shareholders' equity.

1) Hertz makes five adjustments (ignoring ‘Other adjustments’) to net income before including the changes in operating assets and liabilities. List each of these five items and explain why each of these items is added (subtracted) from net income to calculate Net Cash Provided by Operating Activities.

Inventory: Inventory equals COGS divided by number of days in a calendar year (360) times number of days of inventory (20). The cash flow equals the change in inventory level each year until year 10, when the inventory level is recovered.

Depreciation:      Depreciation was not included in the calculation of free cash flows because net CAPX was used.

Nonfinancial working capital represents notes payable, accounts payable and accrued expenses subtracted from accounts receivable and inventory.

Working capital is the excess of a company’s current assets over its current liabilities. Financially healthy firms have positive working capitals.

Cash flow analysis should not include the interest expense. We discount project cash flows with a cost of capital that is the rate of return required by all investors. Interest expenses are part of the costs of capital. If we subtracted them from cash flows, we would be double counting capital costs.

Furthermore, since depreciation is not really a cash outflow, it is added back to earnings before interest and taxes to calculate the operating cash flow.

| Below is an excerpt from the cash flow statement of a firm for fiscal year 2003: Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Amortization of software Tax benefits of employee stock plans Special charges (Gains)/losses on investments Change in operating assets and liabilities: Receivables Inventories Pension assets Other assets Accounts payable Pension liabilities Other liabilities Net cash provided by operating activities Cash flows from investing activities: Payments for plant and other property Proceeds from disposition of plant and other property Investment in software Purchases of marketable securities and other investments Proceeds from disposition of marketable securities and other investments Net cash used in investing activities