CF 1-4A – Cash Flow – Corporate Finance

Let's have a look at problem one for a, we're calculating all kinds of cashflow. The first three parts are just review of what we've already learned in previous problems. So I'm going to jump right into it. So the question gives us financial statements and income statement in a comparative balance sheet. And it says, compute OCF operating cashflow. Okay. We're going to learn so many different ways to calculate this during the course, but the way we introduce in chapter one is one of the more simple and straightforward. It says we start with EBIT and this is going back to problem one, one. So you can flip back to that if you want a more detailed explanation here, but we start with EBIT, which is three 50. We add back the depreciation because of course depreciation is included in EBIT, but it doesn't involve cash. So we're going to add back, um, a hundred thousand. And then we deduct interest or not interest. Pardon me. We deduct taxes because I think you deduct income taxes. So I'm going to minus 85,000 and remember what we're calculating. Operating cashflow is the cashflow generated by the day to day business of the company. I got a cough. I'm going to mute my mic for a half a second. That's better. Um, okay. So let's sum these up three 50 plus a hundred that's four 50 minus 85. Oh dear. I'm going to have to use my calculator three 50 plus a hundred minus 85, three 65. That's our operating cashflow. The day-to-day business of our company is generated 365 grand in positive cashflow. It's possible. This could be negative. Like we could have negative EBIT we, you know, uh, that's very possible. But in this case it was positive and that's what you're hoping for. If you're certainly running your own business, unless you're some sort of weird tech startup that's burning money initially, uh, you want generally to see positive operating cashflows out of a business. Okay. So there we are. We've generated 365 grand in operating cashflow. What about capital spending? How we use that money? Well, one way we might use our money is to buy assets, right? And so this has us analyzing the change in net fixed assets. I always tell myself the story of net fixed assets. You can see it started at five 50 ended at 600. Well, it started at five 50, but it would have gone down by the amount of the depreciation. So if I had five 50 and I depreciated them for a hundred grand, I should be sitting at four 50 to end the year, right? Just math of it says I'd be at four 50 if I didn't buy anything new, but I'm at 600. How did I get from four 50 to 600? I bought a bunch of new assets. How many new assets did I buy? One 50, right? Just the difference there. That is our net capital spending. All right, onto the next, uh, cash flows from the change in working capital. Uh, so this is working capital is the difference between current assets and current liabilities. So for 2028, our working capital is five Oh three minus two, three, five current assets minus current liabilities. It is two 68 for 2029 and this is our working capital and just calculating there, uh, seven 85 minus three 87, just a difference there, three 98. So our working capital went from two 68 to three 98. Our change in working capital was a positive here, three 98 minus two 68, a positive one 30. Our working capital went up by 130 K. Okay. So we've solved the first three. Uh, just reminding you what's happening here. Uh, operating cashflow cash flows from the day to day business. Our day to day business generated $365,000 in positive cashflow. Net capital spending is us buying fixed assets. We bought $150,000 in fixed assets and change in networking capital. Probably the trickiest of three of the three to explain if you're working capital needs go up. It means you're, it's actually negative for your cashflow. Just like, you know, uh, capital spending, you're buying fixed assets. Well, that's negative cashflow, uh, working capital increasing as it did here. Also negative cashflow going to meet my mic for another half second. Okay. Let's continue on to, uh, cashflow to creditors. Uh, so this involves debt, right? It's debt repayments, interest payments. That's really what we're looking at. So debt repayments and interest payments. Let's take a look at what happened here. So I have long-term debt that went from 575 to 610. Oh no, there's not a debt repayment. My debt's going up. Let's take a look at our interest. Our interest is 50. Okay. So we've actually got some work to do. This is more challenging. If debt went down, it's actually really easy to say, Oh, how much did that go down? That's a repayment. Well, that going up is like a negative repayment. It's new borrowing. So I didn't give cash to my creditors. I got cash from my credit, right? They gave me or loaned me $35,000, but I also had to pay off $50,000 in interest. Now that is being paid back. So $35,000 coming in from my creditors minus 50, going back to my creditors gives me cashflow to creditors of just $15,000. Again, I want to, I want to stress this one because it can be a little confusing. My long-term debt went up. If it went down, it means I'm paying it back, right? Your debt goes down because you paid it back. If your debt goes up, you're borrowing money. So this isn't cashflow to creditors, this 35, this is cashflow from creditors. So I have 35K coming in from my creditors. I have 50K to my creditors. So this one is like a, uh, plus cash, right? They're giving me 35, uh, the 50 is minus cash. I'm paying them 50. So on net 15K to creditors. And that's what we were asked to solve for cashflow to creditors. So that one could be a little confusing. I suspect let's do cashflow to stockholders and see what happened here. Our common shares. So shareholders, equity accounts here are the relevant ones are common shares paid in surplus and dividends. So common shares went up by 10 grand paid in surplus by 30. That's money coming from my shareholders. So on total, that's 40K from shareholders, 110K goes to the shareholders in the form of a dividend. So on net 110, 110K in dividends to shareholders, uh, and then there's 40K in investments from shareholders. And the idea there again is common shares goes up and paid in surplus goes up because shareholders are contributing money into the company. So on net I paid 110 out in the form of dividends, 40K, uh, came in from them in the form of investments on net 70K went out to shareholders in total. Okay. So our cashflow, uh, to stockholders is $70,000. Okay. So the final piece of the pie, maybe I'll take a bit of a step back. Uh, so in calculating cashflow to creditors, it's just about the change in debt and the interest, right? If there's more debt, it means we're taking money from our creditors. If there's less debt, we're paying off our creditors. And then you add interest to that, to figure out cashflow to creditors. For stockholders, it's all about common shares. And in this case, paid in surplus, the changes there, uh, track with investments from our shareholders and, uh, dividends are also the other way you might pay shareholders or stockholders. So there we have it. We've solved E let's move on to F show how OCF net capital spending and change in working capital are related to cashflow to creditors and cashflow from, or to stockholders. Okay. So I want to go back to like one of the first slides we showed this chapter, and we sort of said corporate finance is obsessed with cashflow. It is, and we got to manipulate or move cashflow from accounting financial statements to get figures that are useful in corporate finance. So that's just what we're doing here. Okay. So let's actually use this first sort of set of formulas and we'll figure out our cashflow from assets. It wasn't asked specifically, but that's sort of what this question is driving to. You wouldn't know that your first time through though, uh, our cashflow to creditors, we calculated down here of 15 and stockholders is 70. So 15 K 70 K, and that's just what we calculated. So our cashflow from assets is $85,000. So again, a really important number in, um, finance is just cashflow from assets. It's, uh, uh, just a useful number for a lot of our, our, our calculations later on in the course. So there we have it. We figured out our cashflow from assets. Uh, now let's sort of show how that's related to those other three numbers we calculated, so we had operating cash flows of three 65, this is positive cash flow for the company we had capital spending of one 50 well spending it's on the name there that's one 50 negative to the company's cashflow. And we had said working capital changing by one 30 going up by one 30 is also bad for cashflow. It means more money tied up in working capital is not good for cashflow. So three 65 minus one 50 minus one 30, and I end up on 85. So I combine all three of those. I get $85,000. I scroll back up. You can see, I got $85,000 up there, $85,000 down here. These match that's the idea. And so there are some, I think, tricky corporate finance problems where they'll give you like all but one of these and you have to be able to say, Oh, I know these combined to get cashflow from assets. And then I can solve for the missing variable on one side of the equation or the other. I think that's a little bit tricky, but it certainly is a plausible type of question. And I think this way of asking is more reasonable though. So show how OCF net capital spending and change in working capital. The answers from A to C are related to the answers D to E. The answer is they both combine, you know, A, B, C, D or ABC. You combine those answers. You get cashflow from assets. D and E you combine. I think I got these back. No, that's right. D and E you combine the answers to also get cashflow from assets. That's the idea of that final piece. Just wanted to show how they all kind of come together. All right. I hope this video helped. I hope it helped things come together for you a little bit. And if it did, I hope you'll give me a thumbs up. Thanks for watching. See you in the next video. Bye-bye.