Chapter Questions
What are the four basic cycles of a company?
Why do we say that financial flows are the flip side of investment and operating flows?
Define operating cash flow. Should the company be able to spend this surplus as it likes?
Is operating cash flow an accounting profit?
Why do we say that, as a general rule, operating cash flow should be positive? Provide a simple example that demonstrates that operating cash flow can be negative during periods of strong growth, start-up periods and in the event of strong seasonal fluctuations.
When a cash flow budget is drawn up for the purposes of assessing an investment, can free cash flows be negative? If so, is it more likely that this will be the case at the beginning or at the end of the business plan period? Why?
Among the following different flows, which will be appropriated by both shareholders and lenders: operating receipts, operating cash flow, free cash flows? Who has priority, shareholders or lenders? Why?
A feature of a supermarket chain such as Tesco in the UK or the Dutch retailer Ahold is a very fast rotation of food stocks (six days), cash payments by customers, long supplier credit periods ( 60 days) and very low administrative costs. Will the operating cycle generate cash requirements or a cash surplus?
Should the cash outflows of launching a new perfume be considered as an operating outlay or an investment outlay?
How is an investment decision analysed from a cash standpoint?
After reading this chapter, can you guess how to define bankruptcy?
Is debt capital risk free for the lender? Can you analyse what the risk is? Why do some borrowers default on loans?