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Nova Electrics anticipates cash flow from operating activities of $17 million in 20X1. It will need...

Nova Electrics anticipates cash flow from operating activities of $17 million in 20X1. It will need to spend $9.5 million on capital investments to remain competitive within the industry. Common stock dividends are projected at $.40 million and preferred stock dividends at $.30 million.

a. What is the firm’s projected free cash flow for the year 20X1? (Enter your answer in millions of dollars rounded to 2 decimal places.)

b. What does the concept of free cash flow represent?

- Free cash flow represents the funds that are available for investing activities, such as purchasing plant and equipment assets.
- Free cash flow represents the funds that are available for special financing activities, such as a leveraged buyout.
- Free cash flow equals cash flow from operating activities.
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Answer #1

a) The firm's projected free cash flow for the year 20X1 is equal to cash flow from operating activities - capital investments

So, free cash flow to the firm in 20X1 = $17 - $9.5 = $6.50 million.

b) Free cash flow represents the funds that are available for special financing activities, such as a leveraged buyout.

The first and third options are incorrect for the following reasons.

-Free cash flow is obtained by subtracting the cash needed for capital expenses. These include purchasing plant and equipment assets.

-Free cash flow is not equal to the cash flow from operating activities. Cash flow from operating activities does not include the cash required for capital expenses. The free cash flow to the firm = cash flow from operating activities - capital expenses.

Hope this helps. Please let me know if you need further help :-)

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