The financial statements for Nike, Inc., are provided in Appendix C at the end of the text.

The financial statements for Nike, Inc., are provided in Appendix C at the end of the text.

a. Determine the free cash flow for the most recent fiscal year. Assume that 90% of the additions to property, plant, and equipment were used to maintain productive capacity.
b. How might a lender use free cash flow to determine whether or not to give Nike, Inc., a loan?
c. Would you feel comfortable giving Nike a loan, based on the free cash flow calculated in (a)?


Answer:

a.
Recent Fiscal Year End
(all numbers in thousands)
Cash flows from investment in PPE…………………………… $432
Replacement percentage………………………………………… 90%
Cash paid for maintaining PPE…………………………………… $389
Cash flows from operating activities…………………………… $1,812
Less cash paid for maintaining PPE…………………………… (389)
$1,423
b. Free cash flow is often used to measure the financial strength of a business. The
more free cash flow that a business has, the easier it will be for the company to
pay the interest on the loan and repay the loan principal.
c. Yes. Nike’s free cash flow is extremely strong, and is 3.7 times greater than the
capital expenditures necessary to maintain capacity.






Lovato Motors Inc. has cash flows from operating activities of $720,000. Cash flows used for investments in property, plant, and equipment totaled $440,000, of which 85% of this investment was used to replace existing capacity.

Determine the free cash flow for Lovato Motors Inc.


Answer:

Cash flows from investment in PPE…………………………………………… $440,000
Replacement percentage…………………………………………………………… 85%
Cash paid for maintaining PPE…………………………………………………… $374,000
Net cash flow from operating activities………………………………………… $720,000
Less investments in fixed assets to maintain current
production…………………………………………………………………………… 374,000
Free cash flow………………………………………………………………………… $346,000