Wednesday, May 13, 2009

Cash Flow Analysis, pt 3 - CFF

[Cash Flow Analysis Series 1 CFO - 2 CFI - 3 CFF - 4 FCFF - 5 FCFE]

Cash flow from financing (CFF) is usually accompanied by cash flow from investing. It's normally a good sign for companies to look for more financing in order to grow their business, but a bad sign if a company is looking for cash flow to offset operating costs, essentially borrowing for today at the expense of the future. CFF accounts for all transactions between the firm and suppliers of capital (banks and investors).

Also note there is some differences between U.S. GAAP versus IFRS regarding the accounting for interest paid to creditors (included as CFO under U.S. GAAP as interest paid). Otherwise, CFF is generally used to account for cash flows when equity is issued (repurchased), dividends are paid, cash is borrowed or principle is repaid. CFF is influenced as follows:
  • Borrowing (cash flow in)
  • Principle repaid (cash flow out)
  • New equity issued (cash flow in)
  • Shares repurchased (cash flow out)
  • Dividends paid out (cash flow out)
  • Mezzanine financing issued (preferred shares issued resulting in cash flow in)
Immediately it becomes apparent that CFF's two sources of cash, debt and equity financing (or a third for mezz financing), have a direct effect on financial leverage and is affected by the marginal cost of capital (MCC) of each class of financial instrument used to raise cash. This inturn affects WACC.

Also, understanding the changes and sources of CFF assist in understanding changes in solvency and risk have a symetric effect as CFI has on book value for a P/B valuation as previously stated.

[Cash Flow Analysis Series 1 CFO - 2 CFI - 3 CFF - 4 FCFF - 5 FCFE]

1 comment:

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