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
BRYAN

222356

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. Its 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
fund its increase in net fixed assets and net working capital.
Healthy growing companies will pursue suitable debt or equity financing in advance of
its need. Healthy mature companies generally have positive EBITDA and operational
cash flow. Companies in a turnaround situation will show negative EBITDA and
operational cash flow, and minimal new financing cash flow. Therefore, negative cash
flow does not always mean that a company's financial performance was bad, but it is
always a sign that a company needs to take steps to better manage its cash or to access
cash from other sources.

6.

Calculate the net working capital of the company for each of the two years. What
can you conclude about the firm's net working capital?

Current Assets
- Current Liabilities
= Net Working Capital

2003
$ 890,000
$ 355,000
$ 535,000

2004
$ 1,845,450
$ 895,000
$ 950,450

Signal Cable has significantly increased its net working capital in 2004. In business
accounting, working capital is a benchmark measure of your company's ability to meet its
short-term obligations. It's calculated by taking your business' current assets and
subtracting its current liabilities.

The impact of working capital changes are reflected in a firms cash flow statement.
Specifically, the operating cash flow section of the cash flow statement details changes in
its shorter-term working capital needs. A positive working capital figure (current assets
are greater than current liabilities) means a cash inflow for the period measured. In
contrast, a negative working capital position means the firm has spent more cash out than
it brought in managing its working capital, or commitments, within a year. Analyzing
changes in working capital can be important for any business, but is especially important
for firms with seasonal or erratic cash flow needs.

7.

Should the shareholders be concerned about the drop in cash flow or should they be
happy that the earnings per share have increased? Explain your answer.

Negative cash flow occurs when a company's cash outflow over a certain period of time
is higher than its cash inflow. Cash outflow is a fancy way to say "expenditures;" it can
apply to any operating costs, expansion expenses, investments and other costs to the
company. Negative cash flow at the end of a month or quarter can be a bad sign, but
it is not necessarily a sign of financial weakness. The shareholders are rightly concerned
about the drop in cash flow and net profit margin.