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Chapter2GroupAssignment - C hapter 2 Questions 4 7 P...

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Chapter 2 - Questions 4 & 7 Problems 4, 8 & 10 February 3, 2010 Re: Group Assignment 1 Group Members: David Navarro, Jaime Cervantes, Jaime Jackson, Monica Gonzalez and Qiang Leo Ding Q2-4 . Answer: Operating Cash Flow is the amount of cash flow generated by a firm, mathematically, earnings before interest and taxes minus taxes plus depreciation. (OCF= EBIT – taxes + depreciation) Free cash flow is the net amount of cash flow after the firm has met all operating needs and paid for both LT and ST investments. FCF equals to OCF minus Fixed Assets minus (once Current assets minus Accounts payable and minus Accruals). Financial Managers focus on FCF because it tells them exactly how much actual dollars are available for them to invest and also help determine a company actual worth. Q2-7 . Answer: Analyst use ratios to determine a firms financial leverage because the more debt a firms uses in relation to its total assets the greater its financial leverage. A smart credit analyst would use both ratios, (debt ratio) revolves around the level of indebtedness and (coverage ratio) the firms ability to meet the contractual payments associated with the debt. The more a firm borrows the riskier its outstanding stock and bonds.
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