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.