Block Buster Free Cash Flows

Kamran Burki

Blockbuster Problem (M) (1 Unit)

Question 1:

An analysis of the company’s cash flows for the years 2002 – 2004 refutes the company’s decision to eliminate the late fees. Looking at the free cash flows with the late fees for this time period (OCF+ICF), Blockbuster reported 147.7, 405.7, and 103.1 respectively. These numbers show that the company had a decent amount of free cash while collecting late fees. In my analysis, I restated the income statement and cash flows to reflect what the free cash flows would look like if the company decided to eliminate the late fees (Extended viewing fee revenues) in these years. From 2002 – 2004 FCF would be (637.15), (405.37), and (501.25) respectively. The late fees were a significant source of cash flows and revenue for Blockbuster and eliminating them caused a negative free cash flow number for this time period. Analyzing these figures shows that Blockbuster appears to be in the decline stage of the product life cycle.

Question 2:

There is no evidence that the 2005 results benefited from the no-late fee policy. In 2005, Blockbuster did collect some late fee revenue (90mm) and the free cash flows are (184.70) in that year. In comparing this with the projected FCF that includes an estimate 400mm of late fees, we see that the FCF are 163.30. This again shows that the late fees were a significant source of cash flows and eliminating them is actually having a negative impact on the business. Blockbuster would have much better free cash flows had they not decided to eliminate the late fees. The negative cash flow also has an impact on the low capital expenditures that Blockbuster will incur. The reason for this is that the company has to pay down a large amount of debt and will have to sacrifice payments for working capital as well as capex. The goal of the business appears to be shifting from being a profitable business to a firm that is diverting whatever FCF it has to pay down debt. In conclusion, all of this...