Cash flows or Earnings discussion
Business Finance
QUESTIONS
Using the limited information given in this case, address the following issues.
1. What are the primary reason(s) for consistently positive (negative) cashflows for firm A (firm B). What favorable or adverse impact does it have on the firm’s financial condition for this year? For later years?
2. What is your assessment of future viability for firm A and B, respectively?
3. Assume that you are in charge of commercial lending in a bank. Which firm would you prefer to lend the most? The least? Which firm would need external financing the most? The least? State your reasoning.
4. Which would be more useful, earnings or cashflows, to assess the financial performance in a given period, without knowing how a firm would perform in future? Which would be more useful to assess the firm’s equity value? State your reasoning.
