CASH FLOWS

Banikanta Mishra

XIM-Bhubaneswar
CID: 2010

Operating Cash Flow: Base Numbers

Net Sales OR Revenue - Cost of Goods Sold (Exclude Non-Cash Charges) - Taxes = Operating CF

Professor Banikanta MISHRA

Example
$1,509 Net Sales = 750 212 COGS (w/o Non-Cash Charges) Tax

$547 Operating Cash Flow

Professor Banikanta MISHRA 3

Tax: Caveats
To compute tax, bear in mind that Non-cash Charges are shown as Costs Interest Payments are Tax-Deductible Marginal Tax Rate is different from Average
Professor Banikanta MISHRA 4

Computing Net Income (NI)

Net Sales - COGS - Non-cash Charges (e.g. Depreciation) = EBIT (Earnings Before Interest and Taxes) - Interest = EBT (Earnings Before Taxes) or Taxable Income - Taxes = EAT (Earnings After Taxes) or Net Income - Dividends = (Addition to) Retained Earnings
Professor Banikanta MISHRA 5

Computing NI: Example

Net Sales - COGS - Non-cash Charges (Depreciation etc.) = EBIT - Interest = EBT or Taxable Income - Taxes @34% = EAT or Net Income - Dividends = (Addition to) Retained Earnings 1,509 750 65 = 694 70 = 624 212 = 412 103 = 309

Professor Banikanta MISHRA

Deriving Operating CF from NI

NI (Net Income) + Non-Cash Charges $412 65

What does this number represent?

477
70 547

+ Interest = Operating CF
Professor Banikanta MISHRA

Deriving Operating CF from EBIT

EBIT + Depreciation - Taxes
(this has to be known or given)

694 65 212

= Operating Cash Flow

Professor Banikanta MISHRA

547
8

Net Capital Spending

IF Ending NFA = Beginning NFA - Depreciation

THEN
Net Capital Spending = 0 => Purchase (if any) of Fixed Assets = Sales of FA
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Deriving Net Capital Spending

= Ending NFA (Beginning NFA Depreciation) Ending NFA 1,709

- Beginning NFA
+ Depreciation = Net Capital Spending
Professor Banikanta MISHRA

1,644
65 130
10

Deriving Change in NWC

Ending NWC - Beginning NWC = Change in NWC 1,014 684 330

Professor Banikanta MISHRA

11

CFFA: Cash Flow from Assets

OCF (Operating CF) - Net Capital Spending - Change in NWC = CFFA
Professor Banikanta MISHRA

547 130 330 87

12

CF to Creditors/Bondholders
Interest Paid - Net New Borrowing* = CF to Creditors 70 46** 24

*Issue of New Debt Redemption or Retirement of Existing Debt

** LTD in 2007 LTD in 2006 = 454 - 408
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CF to Stockholders/Equityholders
Dividends Paid - Net New Equity Raised* = CF to Stockholders
*Issue of New equity - Repurchase of Existing Equity ** CSPS (Common Stock and Paid-in Surplus)2007 CSPS2006 = 640 - 600
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103 40** 63

Consistency Crosscheck: CF Identity

CF to Creditors + CF to Stockholders = CF from Assets (CFFA) 24 63 87

Professor Banikanta MISHRA

15

Right to the CF
Who does the $547 Operating CF belong to? $70 to Bondholders??

$477 to Stockholders??
Where does the $477 come from??? What about new debt and equity versus old ones???
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Where Goes the OCF?

$70 Interest 103 Dividend

$547
309 Retained (Earnings) 65 Non-cash Item; Still There
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A Financing Picture
Retained CF + Net New Borrowing + Net New Equity = 374 46 40 SOURCES USES

460
= Change in NWC 330

+ Net Capital Spending 130

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Again, Where Goes the OCF?

24 63 CF to Debtholders CF to Equityholdrs Change in NWC Net Capital Spending
19

$547
330 130

Professor Banikanta MISHRA