Balance Business

BWFF 3193 SEMINAR IN FINANCE (B)

GROUP CASE STUDY

SIGNAL CABLE COMPANY

PREPARED FOR

ASSOCIATE PROF. DR. ROHANI MD. RUS

PREPARED BY

MUHAMMAD FAIZ BIN MOHD RAZALI 222356

BRYAN

5. Measure the free cash flow of the firm. What does it indicate?

FREE CASH FLOW FOR THE FIRM is a measure of financial performance that expresses the net amount of cash that is generated for the firm, consisting of expenses, taxes and changes in net working capital and investments. This is a measurement of a company's profitability after all expenses and reinvestments. It's one of the many benchmarks used to compare and analyze financial health.

A positive value would indicate that the firm has cash left after expenses. A negative value, on the other hand, would indicate that the firm has not generated enough revenue to cover its costs and investment activities. In that instance, an investor should dig deeper to assess why this is happening - it could be a sign that the company may have some deeper problems. Free cash flow is measured as follows:

FCF = Operating cash flow – Net capital spending – Change in net working capital

Operating Cash flow (OCF) =

Earnings before interest and taxes + Depreciation – Taxes

OCF = $393,500 + $79,000 – $95,400 = $ 377,100

Net Capital Spending (NCS) =

Ending Net Fixed Assets -Beginning Net Fixed Assets + Depreciation

NCS = $1,068,000 - $357000 + $79,000 = $ 790,000

Change in Net Working Capital =

Ending NWC – Beginning NWC

Change in NWC = [($1,845,450- $895,000)- ($890,000-$355,000)]

= [$950,450 – $535,000]

= $ 415,450

Free Cash Flow = $377,100 - $790,000 – $415,450

= -$ 828,350

Based on the calculation, Signal Cable had a negative amount of free cash flow for the firm. It’s because of the increase in net capital spending and net working capital. The free cash flow calculation shows that Signal cable raised additional long-term debt to...