Cash Flow from Assets = CF to Creditors + CF to Shareholders
1) OCF (Operating Cash Flow)
OCF = EBIT + Dep. – Tax
EBIT = Sales – Costs – Expenses - Dep Ex.
Tax = (EBIT-Interest) x Tax Rate
1) CF to Creditors = Interest – Net New Borrowing
CF to Cred = Interest - Long Term Debt
(if given a chart with current year and previous year,
subtract new LTD from old LTD to get 1 number)
2) (-) Capital Spending
Cap. Ex = NFAend – NFAbeg + Dep
2) (+) CF to Shareholders = Dividends – Net New Equity Raised
CF to Shareholders = Dividends – Common Shares
3) (-) Net Working Capital (NWC)
ΔNWC = ΔCA (cur. ass.) – ΔCL (cur. liab.)
If # is (+) = use of cash, if # is (-) = source of cash
Creditors are also bondholders.
If Dividends aren’t given: Div = NI – (RetainedEfinal – REinitial)
CF from Assets = OCF – Cap Ex. – NWC
CF to Cred + CF to Shareholders = CF from Assets
Agency Problems: Conflict between stakeholders
bondholders, shareholders, banks, managers, employees,
suppliers, customers, government
Results in agency costs and loss of value to corporation
Sources of Cash: A firm’s activities that generates cash.
Decreases in assets, and increases in liabilities and equity
Uses of Cash: A firm’s activities in which cash is spent.
Increases in assets, and decrease in liabilities and equity
Regular Annuities VS Annuities Due:
Regular Annuities: periodic payments occur at END of
Annuities Due: periodic payments occur at BEG. “CF
start today / immediately”
Ex. Your parents deposited $25000 into a bank account with 8 %
interest. You plan to withdraw equal amounts from the account
of each of the next four years (total of 4
withdrawls will be made starting today). What is the MOST you
can withdraw annually?
Present Value of Perpetuity
An investment pays $2000 at the end of every year
you require a return of 10%, how much would you be willing to
pay for this investment?
MAKE SURE TO SWITCH BACK RIGHT AWAY
FV w/ Simple Interest:
PV = present value, N = years, r = interest rate, FV = future
You invest 1000 today at 5% per year interest, how much would
you have in 5 years?
Int = 0.05(1000) = $50/year
FV = PV(1+Nr)
= 1000(1+(5x0.05) =
If a firm’s ROE is 14.92%, the EM
is 1.35 & PM is 8.5,
what is TAT?