Question

Nova Electrics anticipates cash flow from operating activities of \(6 million in 20X1. It will need to spend \)1.2 million on capital investments to remain

competitive within the industry. Common stock dividends are projected at

\(.4 million and preferred stock dividends at \).55 million.

a. What is the firm’s projected free cash flow for the year 20X1?

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

Short answer

a. Projected free cash flow of Nova Electrics for the year 20X1: $3,850,000

b. Free cash flow means the net cash balance generated by an organization during a particular period.

Step-by-step solution

Projected free cash flow of Nova Electrics for the year 20X1

$\begin{array}{rcl}\mathrm{Projected}\mathrm{free}\mathrm{cash}\mathrm{flow}& =& \mathrm{Cash}\mathrm{flow}\mathrm{from}\mathrm{operating}\mathrm{activity}-\mathrm{cashoutflow}\mathrm{from}\mathrm{investing}\mathrm{activity}-\mathrm{common}\mathrm{stock}\mathrm{dividend}-\mathrm{preferred}\mathrm{stock}\mathrm{dividend}\\ & =& \$6,000,000-\$1,200,000-\$400,000-\$550,000\\ & =& \$3,850,000\end{array}$

Free cash flow

Free cash flow represents the cash generated by an organization after deducting all the cash outflows. The free cash flow of the company supports the operational and investment decision of the company.