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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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Analyzing the Statement of Cash Flows

Rollins Inc. is considering expanding its operations into different regions of the country; how-ever, this expansion will require significant cash flow as well as additional financing. Rollins reported the following information for 2019: cash provided by operating activities, $387,200; cash provided by investing activities, $108,700; average debt maturing over the next 5 years, $345,500; capital expenditures, $261,430; cash dividends, $40,000.

Required:

Compute free cash flow and the cash flow adequacy ratio. ( Note: Round ratio to two decimal places.) Comment on Rollins’ ability to expand its operations.

To determine

Introduction:

A company’s free each flow represents the cash flow that a company is able to generate after considering the maintenance or expansion of its assets (Capital expenditures) and the payment of dividends. Having positive free cash flow allows a company to pursue profit generating opportunities. However. negative free cash flow is not necessarily a bad thing, For example, a company making large investments in productive assets (large capital expenditures) may show negative fret cash flow. If these investments provide a high rate of return, this strategy will be good for the company in the long run.

In money related bookkeeping, a cash flow explanation, otherwise called the announcement of cash flows, is a fiscal summary that demonstrates how changes in monetary record records and salary influence cash and cash reciprocals, and separates the examination to working, investing, and financing activities.

To choose:

Compute free cash flow and the cash flow adequacy ratio.

Comment on Rollin’s ability to expand its operations.

Explanation

Free cash flow = Net cash flow from operating activity − Capital expenditure − cash dividend

=$387,200$261,430$40,000=$85,770

Cash flow adequacy ratio =free cash flowaverage amount of debt maturing over the next�

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