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Homework 1 − Financial Statements and Ratio Analysis Dr. Stanley D. Longhofer 1) Question 3-6 from the text Free cash flow is the amount of cash that could be withdrawn from the firm without harming its ability to operate and to produce future cash flows. It is calculated as after-tax operating income plus depreciation less capital expenditures and the change in net working capital. It is more important than net income because it shows the exact amount available to all investors (stockholders and debtholders). The value of a company’s operations depends on expected future free cash flows. Therefore, managers make their companies more valuable by increasing their free cash flow. Net income, on the other hand, reflects accounting profit but not cash flow. Therefore, investors ought to focus on cash flow rather than accounting profit. 2) Question 3-7 from the text Yes. Negative free cash flow is not necessarily bad. Most rapidly growing companies have negative free cash flows because the fixed assets and working capital needed to support rapid growth generally exceed cash flows from existing operations. This is not bad, provided the new investments will eventually be profitable and they contribute to free cash flow. 3) Problem 3-7 (b) from the text: ������������������ = ������������������������ × (1 − ������) − Δ ������������������������������ ������������������������������������ − Δ ������������������ ������������������������������������������ ������������������������������������������ = $39,000 × (1 − 0.40) − $3,000 − $9,725 = $10,675

Finance 340 – Financial Management I

4) Problem 3-10 (b) from the text:

5) Question 4-4 from the text:

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