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Homework answers / question archive / The following are summary cash flow statements for three roughly equal-sized companies:   ($ millions) A B C Net cash flows from operating activities $(300) $(300) $300 Net cash used in investing activities (900) (30) (90) Net cash from financing activities 1,200 210 (240) Cash balance at beginning of year 150 150 150 a

The following are summary cash flow statements for three roughly equal-sized companies:   ($ millions) A B C Net cash flows from operating activities $(300) $(300) $300 Net cash used in investing activities (900) (30) (90) Net cash from financing activities 1,200 210 (240) Cash balance at beginning of year 150 150 150 a

Finance

The following are summary cash flow statements for three roughly equal-sized companies:

 

($ millions) A B C
Net cash flows from operating activities $(300) $(300) $300
Net cash used in investing activities (900) (30) (90)
Net cash from financing activities 1,200 210 (240)
Cash balance at beginning of year 150 150 150

a. Calculate each company s cash balance at the end of the year

b. Explain what might cause company C's net cash from financing activities to be negative

c. Looking at companies A and B, which company would you prefer to own? Why?

d. Is company C's cash flow statement cause for any concern on the part of C's management or shareholders? Why or why not?

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a)Cash Flow Statement:

 

($ in millions) A B C
Net Cash Flow at beginning of the year $150 $150 $150
Add: Net Cash Flow from Operating Activities $(300) $(300) $300
Add: Net Cash Flow in Investing Activities $(900) $(30) $(90)
Add: Net Cash Flow from Financing Activities $1,200 $210 $(240)
Cash Balance at end of year $150 $30 $120

b) Company C has a negative cash flow through financing. There can be two possibilities attached to it. One is that C might have retired any long-term debt or the other is that C might have paid dividend to its shareholders.

c) While comparing firm A and B, here net cash of Firm A is more than Firm B, also the net cash in investing activities of A is more than B, which means that investment done by A is more and can bring more returns in near future. Also the net cash through financing activities is more in firm A that may be due to possibility of debt financing which can give the tax shield benefits to firm A. Therefore, A should be preferred to own.

d) While looking into the cash flow of Company C, it is visible that the firm last year generated a net cash of $150 in millions and now it is reduced to $120 in millions. Also firm C has blocked its cash in many other activities which or non cash generating activities and in future can cause liquidity issues. So as a management point of view there should be an optimal management between all the activities to get good returns as well as have adequate working capital.

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