Cash Flow to Investors
The Cash Flow to Investors in the firm, i.e., the debtholders and equityholders, indicates how the cash flow generated by the firm's assets are distributed to the debtholders and equityholders. The calculations illustrated on this page will refer to the Balance Sheet and Income Statement which follow.
Cash Flow to Debtholders
The Cash Flow to Debtholders is defined as debt service less new long term borrowing. (Debt service represents interest expense and repayments of principal.) An equivalent definition which makes use of values which can readily be obtained form the Balance Sheet and Income Statement is interest expense less net new borrowing. This can be calculated as follows:
Cash Flow to Debtholders = Interest Expense - Ending Long-term Debt + Beginning Long-term Debt
Interest Expense is the fundamental cash flow from the firm to its debtholders. Moreover, if a firm's Long-term Debt increases from one year to the next (i.e., more new debt was issued than was repaid) then the debtholders supplied the firm with additional cash.
Cash Flow to Common Stockholders
The principal cash flow from the firm to its Common Stockholders is dividends. Firms also issue new stock periodically. This represents a cash flow from the Common Stockholders to the firm. (Some firm also repurchase their own stock, i.e., a cash flow from the firm to its stockholders. When this occurs the repurchased shares are recorded on the Balance Sheet as Treasury Stock. (The Balance Sheet used for the examples on this page indicates that the firm has no Treasury Stock.) The Cash Flow to Common Stockholders can be calculated as common dividends paid less net new common equity raised.
Cash Flow to Preferred Stockholders
The Cash Flow to Preferred Stockholders is defined as Preferred Dividends Paid less net new Preferred Equity raised.
In the example on this page, there is no Preferred Stock. Thus the Cash Flow to Preferred Stockholders for this firm is 0.
Cash Flow to Investors (Debtholders and Equityholders)
Once the above items have been determined, the Cash Flow to the Investors in the Firm can be calculated as follows:
Notice that the Cash Flow to Investors equals the Cash Flow from Assets determined on the previous page. This was not by accident. Thus, just as there is a Balance Sheet Identity (Total Assets = Total Liabilities and Owners' Equity) there is also a Cash Flow Identity (Cash Flow from Assets = Cash Flow to Investors).
© 2002 - 2010 by Mark A. Lane, Ph.D.