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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Chasse Building Supply Inc. reported net cash provided by operating activities of $243,000, capital expenditures of $112,900, cash dividends of $35,800, and average maturities of long-term debt over the next 5 years of $122,300. What is Chasse’s free cash flow and cash flow adequacy ratio?

a. $94,300 and 0.77, respectively c. $130,100 and 1.06, respectively

b. $94,300 and 0.82, respectively d. $165,900 and 1.36, respectively

To determine

Introduction:

Free cash means a companiesrepresent the cash flow that a company is able to generate after considering the maintenance or expansion of its assets (capital expenditure) and the payment of dividends.

Cash flow adequacy means a ratio indicates of the company’s credit quality. A second useful measure is the cash flow afequacy ratio. Generally, a higher cash flow adequacy ratio signals that a company is a better credit risk

To choose:

What is chasse’s free cash flow and cash flow adequacy ratio?

Explanation

Explanation for correct answers:

Free Cash flow = Net cash flow from operating activities − capital expenditure − cash dividends

Cash flow adequacy = free cash flowaverage amount of debt maturing over the next 5 year

Free cash flow = =$243000$<

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