1. Evaluate the sources and uses of cash for Wal-mart Stores Inc. including:
a. the major sources and uses of cash flow between operating, investing, and financing activities over the past five years;
b. significant determinants of operating cash flows;
c. significant determinants of investing cash flows; and
d. significant determinants of financing cash flows.
From your evaluation, is operating cash flow positive and sufficient to cover capital expenditures?
2. Common size statement analysis
a. Prepare a common size cash flow statement using net sales as the common size and keep 2 decimal places in the percentage.
b. Are depreciation expenses and capital expenditure significant components in the cash flow statement percentagewise? Is that surprising?
c. Percentagewise, is operating cash flow higher than net income? Is that good?
d. Do operating cash flows meet the needs of investment and distribution? Provide your comment(s) on the trend of the answer to this question?
3. Cash flow ratios
Calculate free cash flow to the firm (FCFF) and free cash flow to the equity(FCFE). What is the firm's position of free cash flows over the past THREE years?Calculate performance ratios and coverage ratios for the past THREE years: cash flow to revenue; cash return on assets; cash return on equity; cash to income; debt coverage; and interest coverage. Keep three decimal places in ratio calculations, such as .182.How are the firm's cash performance, financial risk, and the ability to meet interest obligations according to those ratios over the past THREE years?
Final product: Word document with Excel tables copied and pasted.
Hints:
1. Determinants of cash flows. We examine determinants of operating cash flow to assess the quality of operating cash flow. Determinants are components. Specifically, we study the change of accounts of current assets and current liabilities and their impact on operating cash flow. Note that current assets and current liabilities are economic recourses and sacrifices to generate operating cash flow. Manufacturing and selling are usually major business operations of a firm and thus we need to scrutinize any cash flow related to them.
For example, if a firm had an increase of A/R (more credit sales) and an increase of inventories (more unsold items), both of which tied up some cash and had negative impact on its ability to generate cash from business operations. Nonetheless, this firm was able to take advantage of free financing and conserve some cash, evidenced by an increase of A/P. Overall, its ability to generate cash from its business operations deteriorated in that year, as indicated by a net decrease of cash from those three accounts of the most important operating assets and liabilities.
Investing cash flows: asset acquisitions indicate future growth opportunities while asset disposals may suggest the opposite. Evaluate those in the backdrop of macro-economy, life stage of the firm and the firm performance. For example, a cash-constrained firm may report an amount of asset disposals higher than that of asset acquisitions.
Investing cash flows: notice the change of inflows and outflows. Evaluate those in the backdrop of macro-economy, life stage of the firm and the firm performance.
You also need to observe the trend and volatility of those determinants for a complete picture.
2. Pay close attention to the calculation of debts. As stated in the guidelines, debts include debts, bonds, borrowings, loans and leases. Examine related accounts carefully. Be careful with the calculation of net borrowing.
3. Capital assets, fixed assets and property, plant & equipment are often used interchangeably. Capital expenditure refers to the expenditure to acquire those assets. Note expenditure is normally positive. A negative expenditure in the financial statement indicates a subtraction, not a negative expenditure.
4. For simplicity, use the following formula to calculate free cash flow. Ignore other formulas in the textbook.
Free cash flow to the firm (FCFF)
CFO + interest expense *(1-tax rate) - capital expenditures
Free cash flow to the equity (FCFE)
CFO - capital expenditures + net borrowing
5. We suggest that you summarize basic data for the calculations and show those data before your calculations. Copy and paste them into the Word document or attach the Excel file. Note that fiscal years may not match calendar years. For example, fiscal year 2012 may end in the calendar year of 2013, but we still analyze the performance of the fiscal year of 2012.
Download:- Cashflow.xlsx