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BlackZzzverrR [31]
3 years ago
15

Management can make any form of distribution to the firm’s shareholders using the company’s free cash flow (FCF). The underlying

objective is to maximize shareholder wealth by increasing the firm’s value. Any use of FCF that negatively affects the firm’s value is not considered a good use of the FCF.
Which of the following uses is considered to be a good use of free cash flow?

1.Invest in nonoperating assets
2.Invest in operating assets
3.Theoretically, there are some traditional ways of using FCF. If a company uses all of its FCF to pay off all of its debt, it would reap the maximum benefit from the tax-deductible component of interest payments toward the debt.
4.This statement is false because if the firm uses its FCF to pay off all of its debt, it would have and no deductible.
Business
1 answer:
vovikov84 [41]3 years ago
3 0

Answer:

A good use of free cash flow is to Invest in nonoperating assets

Explanation:

Free cash flow (FCF) is a measure of how much cash a business generates after accounting for capital expenditures such as buildings or equipment. This cash can be used for expansion, dividends, reducing debt, or other purposes.

If the underlying objective is to maximize shareholder wealth by increasing the firm’s value. Any use of FCF that negatively affects the firm’s value is not considered a good use of the FCF.

A good use of FCF would be to invest in nonoperating assets such as marketable securities, investments in other companies, etc.)

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Question Continuation

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1. The journal entry on January 31 to record the first month of revenue under the contract.

2. Assuming total cost savings exceed target, the journal entry on June 30 to record receipt of the bonus.

3. Assuming total cost savings fall short of target, the journal entry on June 30 to record payment of the penalty.

Answer:

1. The journal entry on January 31 to record the first month of revenue under the contract.

Possible Price -------------------------------Possibility------------Expected Amount

$130,000 ($20,000*6+$10,000) ------80% ------- --------------$104,000 (80% * $130,000)

$110,000 ($20,000*6-$10,000) --------20% -----------------------$22,000 (20% * $110,000)

Expected value--------------------------------------------------------------$126,000 ($104,000 + $22,000)

Accounts ------------------------Debit------------Credit

Cash -------------------------------$20,000 (Debit)

Bonus receivable----------------$1,000 (Debit)

Service revenue --------------------------------- $21,000 ($126,000/6)(Credit)

2. If total cost savings exceed target, record the entry on June 30 for receipt of the bonus

Accounts --------------Debit--------------------------Credit

Cash --------------------- $10,000 (Debit)

Bonus receivable-------------------------------------$6,000 (Credit) ($1000 * 6)

Service revenue ------------------------------------- $4,000 (Credit)

3. If total cost savings fall short of target and record the entry on June 30 for payment of the penalty.

Accounts --------------Debit--------------------------Credit

Service Revenue ---------------- $16,000 (Debit)

Bonus receivable-------------------------------------$6,000 (Credit) ($126,000 / 6)

Cash ------------------------------------- $4,000 (Credit)

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