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# Free Cash Flow Assess a Company’s Liquidity; Ability to Meet Immediate Obligations, Math Problem Example

Pages: 1

Words: 304

Math Problem

Cash from operating activities is intended to indicate the cash-generating capability of the company but it fails to take into account that a company must invest in new fixed assets just to maintain its current level of operations and it must at least maintain dividends at current levels to satisfy investors.

Free cash flow = cash provided by operating activities – capital expenditures – dividends

What is Specialty’s free cash flow?

100,000

Cash debt coverage ratio assesses a company’s solvency; the ability to survive over the long term.

Cash provided by operations divided by average total liabilities

• One measure of solvency is the debt to total assets ratio which is just one point in time.
• A measure of solvency that uses cash figures is the cash debt coverage ratio
• This cash debt coverage ratio measures a company’s ability to repay its liabilities from cash generated from operations.

What is Specialty’s cash debt coverage ratio?

8%

What is Specialty’s debt to total assets ratio?

2%

Practice Question 4 Calculate the following ratios for Tootsie Roll and Hershey.

 Free Cash Flow Tootsie Roll 2007 Hershey 2007 Cash provided by operating activities 90,064 778,836 Less Capital expenditures 14,767 189,698 Less Dividends paid 17,542 252,263 Free cash flow 57,755 336,875 Free cash flow as a percentage of operating activities (free cash flow divided by cash provided by operating activities) 64% 43%

 Cash debt coverage ratio Tootsie Roll 2007 Hershey 2007 Cash provided by operating activities 90,064 778,836 Beginning total liabilities 160,958 3,474,142 Ending total liabilities 174,495 3,623,593 Average total liabilities 167,727 3,548,868 Cash debt coverage ratio .54 .22 Total assets 812,725 4,247,113 Debt to total assets 21% 83%

Which company has more free cash flow?

Tootsie Roll has more free cash flow.

Which company is more liquid?  Why?

Tootsie Roll is more liquid, because it has a greater ability to meet immediate obligations.

Which company is more solvent?  Why?

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