Cash Flow to Investors

	Financial Cash Flow

	Concepts

	Cash Flow from Assets

	Cash Flow to Investors

	Financial Cash Flow Equations

	Tools & Problems

	Financial Cash Flow Exercise

	Financial Cash Flow Quiz

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.

Balance Sheet ($ in Millions)
Assets	1998	1997	Liabilities and Owners' Equity	1998	1997
Current Assets			Current Liabilities
Cash	690	600	Accounts Payable	530	460
Accounts Receivable	340	300	Notes Payable	240	240
Inventory	120	100	Total Current Liabilities	770	700
Total Current Assets	1150	1000	Long-Term Liabilities
			Long-Term Debt	571	710
Fixed Assets			Total Long-Term Liabilities	571	710
Property, Plant, and Equipment	1210	1200	Owners' Equity
Less Accumulated Depreciation	357	280	Common Stock ($1 Par)	122	120
Net Fixed Assests	853	920	Capital Surplus	218	210
			Retained Earnings	322	180
			Total Owners' Equity	662	510
Total Assets	2003	1920	Total Liab. and Owners' Equity	2003	1920

Income Statement ($ in Millions)
	1998
Sales	1710
Cost of Goods Sold	1100
Administrative Expenses	100
Depreciation	77
Earnings Before Interest and Taxes	423
Interest Expense	50
Taxable Income	373
Taxes	30
Net Income	343
Dividends	201
Addition to Retained Earnings	142

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 Debtholders Example

Using information from the above Balance Sheet and Income Statement.

Solution:

Cash Flow to Debtholders = $50 - $571 + $710 = $189

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 Common Stockholders = Dividends Paid

- (Ending Common Stock - Beginning Common Stock)

- (Ending Capital Surplus - Beginning Capital Surplus)

+ (Ending Treasury Stock - Beginning Treasure Stock)

Cash Flow to Common Stockholders Example

Using information from the above Balance Sheet and Income Statement.

Solution:

Cash Flow to Common Stockholders = $201 - ($122 - $120) - ($218 - $210) - ($0 - $0) = $191

Cash Flow to Preferred Stockholders

The Cash Flow to Preferred Stockholders is defined as Preferred Dividends Paid less net new Preferred Equity raised.

Cash Flow to Preferred Stockholders = Preferred Dividends Paid

- (Ending Preferred Stock - Beginning Preferred Stock)

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:

Cash Flow to Investors = Cash Flow to Debtholders

+ Cash Flow to Common Stockholders

+ Cash Flow to Preferred Stockholders

Cash Flow to Investors Example

Using information from the previous examples.

Solution:

Cash Flow to Investors = $189 + $191 + $0 = $380

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).