Corporate Finance

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Corporate Finance

(Increase)/decrease in accounts payable

(Increase)/decrease in taxes payable

Net cash provided by operating activities xxxx

Cash flow from investing activities
Capital expenditures
Proceeds from sale of equipment
Proceeds from sale of investments
Investment in subsidiary

Net cash provided by financing activities xxxx

Cash flow from financing activities
Payments of long-term debt
Proceeds from issuance of long-term debt
Proceeds from issuance of common stock
Dividends paid
Purchase of treasury stock

Net Cash provided by (used in) financing activities xxxx

Increase (decrease) in cash xxxx

Their cash flow from operations will be slightly more than the reinvestments. Firms in the declining
phase will have surplus cash from operations, which could be returned to shareholders, and to pay off debt
for revitalized product lines. Turnarounds are characterized by cash inflows due to freeing up of assets and
income statement losses. Thus, the cash flow pattern indicates the position of a company in its business life-
cycle the nature of its model. To start with, cash flow from operations should be positive and growing.
Second, see whether the company is investing to grow, i.e., whether investments are more than depreciation.
Healthy companies typically purchase more assets than they sell. So cash flow from investing will usually
be negative. To judge whether a company is doing well or not one must use evidence from all pieces and
put them together. Let us apply what we have learnt so far to the three companies presented in Exhibit 5.6.
If we were to choose Company-3 for the sake of illustration: What are the major sources and uses of cash for
this company? What does the company do with the cash? Does it invest adequately? Here are some salient
features:

1999 2000 2001

Major source Loan proceeds Decrease in W.C. Dec. in W.C.
Revenue inflow Non-op. Income Revenue inflow
Decrease in working
Capital
Major uses Purchase of fixed assets Purchase of F.A. Purchase of F.A.
Interest Interest Interest
Repayment of loans Repayment of loans
CFO >NI Yes Yes Yes
Trends in Income – Losses have increased Decrease in loss
CFO – Up Down
Dividends Yes No No
Net borrowing Borrowed Repaid Repaid
Working capital Decreasing Decreasing Decreasing

Exhibit 5.5 contd.