Ross et al.: Fundamentals
of Corporate Finance, Sixth
Edition, Alternate EditionI. Overview of Corporate
Finance- Financial Statements,
Taxes, and Cash Flow
© The McGraw−Hill^73
Companies, 2002Dole had a cash flow from assets of $181. Net income was positive at $79. Is the fact
that cash flow from assets was negative a cause for alarm? Not necessarily. The cash
flow here is negative primarily because of a large investment in fixed assets. If these are
good investments, then the resulting negative cash flow is not a worry.
Cash Flow to Stockholders and Creditors We saw that Dole Cola had cash flow
from assets of $181. The fact that this is negative means that Dole raised more money
in the form of new debt and equity than it paid out for the year. For example, suppose
we know that Dole didn’t sell any new equity for the year. What was cash flow to stock-
holders? To creditors?
Because it didn’t raise any new equity, Dole’s cash flow to stockholders is just equal
to the cash dividend paid:
Now, from the cash flow identity, we know that the total cash paid to creditors and
stockholders was $181. Cash flow to stockholders is $30, so cash flow to creditors
must be equal to $181 30 $211:
Cash flow to creditors Cash flow to stockholders$181
Cash flow to creditors $30 $181
Cash flow to creditors $211Because we know that cash flow to creditors is $211 and interest paid is $30 (from the
income statement), we can now determine net new borrowing. Dole must have bor-
rowed $241 during the year to help finance the fixed asset expansion:
CONCEPT QUESTIONS
2.4a What is the cash flow identity? Explain what it says.
2.4bWhat are the components of operating cash flow?
2.4c Why is interest paid not a component of operating cash flow?CHAPTER 2 Financial Statements, Taxes, and Cash Flow 41DOLE COLA
2002 Cash Flow to Stockholders
Dividends paid $30
Net new equity raised 0
Cash flow to stockholders $30DOLE COLA
2002 Cash Flow to Creditors
Interest paid $ 30
Net new borrowing 241
Cash flow to creditors $211