Test #1 Multiple Choice

What is the formula for Cash Flow From Assets (CFFA)?

CFFA = Operating Cash Flow − Change in Net Working Capital − Net Capital Spending (CFFA = OCF − ΔNWC − NCS)

What does NCS stand for?

Net Capital Spending.

Is Cash Flow From Assets (CFFA) a cash inflow or cash outflow to the company?

Cash inflow to the company.

Is depreciation a cash flow?

No. Depreciation is not a cash flow because no cash changes hands.

Why is Net Income not the same as cash flow?

Net Income includes depreciation, which is a non-cash expense.

What is the formula for Cash Flow to Creditors (CFCR)?

CFCR = Interest Paid − Net New Borrowing.

How do you calculate Net New Borrowing?

Net New Borrowing = Ending Long-Term Debt − Beginning Long-Term Debt.

What does LTD stand for?

Long-Term Debt.

If Interest Paid is LESS than Net New Borrowing, is CFCR positive or negative?

Negative.

What does a negative CFCR mean?

The firm has taken out new loans in an amount greater than the interest being paid. Negative CFCR is a cash inflow to the firm.

If Interest Paid is GREATER than Net New Borrowing, is CFCR positive or negative?

Positive.

What does a positive CFCR mean?

The firm has repaid debt. Positive CFCR is a cash outflow from the firm.

What is the formula for Cash Flow to Shareholders (CFSH)?

CFSH = Dividends Paid − Net New Equity.

How do you calculate Net New Equity?

Ending Common Stock and Paid-in Surplus − Beginning Common Stock and Paid-in Surplus.

Should retained earnings be included when calculating CFSH?

No. Retained earnings are retained by the firm and are not paid out to shareholders.

Why shouldn't Total Equity be used to calculate Net New Equity for CFSH?

Total Equity includes both common stock and retained earnings. Retained earnings are not included in CFSH.

If Dividends Paid are LESS than Net New Equity, is CFSH positive or negative?

Negative.

What does a negative CFSH mean?

The firm issued new stock in an amount greater than the dividends paid. Negative CFSH is a cash inflow to the firm.

If Dividends Paid are GREATER than Net New Equity, is CFSH positive or negative?

Positive.

What does a positive CFSH mean?

The firm has repurchased stock from shareholders. Positive CFSH is a cash outflow from the firm.

Where is Future Value (FV) located on a financial timeline?

Later on the timeline.

Does FV have a direct or indirect relationship with the interest rate?

Direct relationship.

What happens to FV when the interest rate increases?

FV increases.

What happens to FV when the interest rate decreases?

FV decreases.

Does FV have a direct or indirect relationship with time?

Direct relationship.

What happens to FV when the amount of time increases?

FV increases.

What happens to FV when the amount of time decreases?

FV decreases.

According to the study guide, which is greater: FV or PV?

FV is greater than PV.

Does PV have a direct or indirect relationship with the interest rate?

Indirect relationship.

What happens to PV when the interest rate increases?

PV decreases.

What happens to PV when the interest rate decreases?

PV increases.

Does PV have a direct or indirect relationship with time?

Indirect relationship.

What happens to PV when the amount of time increases?

PV decreases.

What happens to PV when the amount of time decreases?

PV increases.

According to the study guide, which is less: PV or FV?

PV is less than FV.

What is an easy way to remember the FV relationships?

FV goes WITH time and interest rates: Time ↑ → FV ↑ and Interest Rate ↑ → FV ↑.

What is an easy way to remember the PV relationships?

PV goes AGAINST time and interest rates: Time ↑ → PV ↓ and Interest Rate ↑ → PV ↓.

From the firm's perspective, what does a negative CFCR or CFSH generally represent?

A cash inflow to the firm.

From the firm's perspective, what does a positive CFCR or CFSH generally represent?

A cash outflow from the firm.