TheCalculationofFreeCashFlow

ThreemethodstocalculateFCF: 1. Usethesourcesofcashflowequation:

C - I = OI - NOA
thatis,freecashflowisoperatingincomeadjustedforthechangeinnet operatingassets 2. Usethedispositionofcashflowsequation:

C - I = NFE - NFO + d
thatis,freecashflowisnetfinancialexpenses,adjustedforthechange innetfinancialobligations,plusdividendstocommonshareholders. 3. FCFcanalsobeobtainedfromthereformulatedStatementofCash Flows.

CalculationofFreeCashFlow: Nike,Inc.:2004
Method 1: Operating income 2004 Net operating assets 2004 Net operating assets 2003 Free cash flow 2004 C I = OI - $ 1,035 $ 4,551 4,330 (221) $ $814

Method 2: Net financial expenses 2004 Net financial obligations 2004 Net financial obligations 2003 Net dividend Free cash flow 2004 2004

C I = NFE - FO + d $ 16 (289) 302 591 207 $814

CalculationofFreeCashFlow: Reebok,2004
Method 1:
C I = OI - Operating income Net operating assets Net operating assets Free cash flow 2004 2004 2003 2004 $ 237 $1,212 731 481 $ (244)

Method 2:

C I = NFE NFO + d +MI(income) -MI(balance sheet) Net financial expenses 2004 Net financial obligations 2004 Net financial obligations 2003 Net dividend 2004 Minority interest in income Change in minority interest in balance sheet Free cash flow, 2004 $ 18 (23) (316) (293) 23 5 3 ___________ $ (244)

TheStandardGAAPStatementofCashFlows
Standard Statement of Cash Flows Cash Flow from Operations g Activities - Cash Used in Investing + Cash from Financing Activities = in Cash and Cash Equivalents

ReformulatedStatementofCashFlows
Cash flow from Operations - Cash investments =Free Cash Flow from Operating Activities Cash Paid to Shareholders + Cash Paid to Debtholders and Issuers =Cash Paid for Financing Activities

This format follows the cash conservation equation: CI=d+F

IndirectMethodforCashFlowfromOperations
Netincome +Accruals =Cashfromoperations Nike sstatement(tofollow)employstheindirectmethod Nikes (asdoalmostallfirms): 2004 Netincome $945.6millions Accruals 568.8 Cashprovidedbyoperations $1,514.4 millions

Nike,Inc.GAAPStatementofCashFlows

2004 Cash provided (used) by operations: Net income Income charges not affecting cash: Cumulative effect of accounting change Depreciation Deferred income taxes Amortization and other Income tax benefit from exercise of stock options Changes in certain working capital components: Decrease (increase) in accounts receivable (Increase) decrease in inventories (Increase) decrease in prepaids and other current assets Increase in accounts payable, accrued liabilities and income taxes payable Cash provided by operations Cash provided (used) by investing activities: Purchases of short-term investments Additions to property, plant and equipment and other Disposals of property, plant and equipment Increase in other assets (Decrease) increase in other liabilities Acquisition of subsidiary, net of cash acquired Cash used by investing activities

Year Ended May 31, 2003 (In millions) 474.0 266.1 239.3 55.0 23.2 12.5

2002

945.6 252.1 19.0 58.3 47.2

663.3 5.0 223.5 15.9 48.1 13.9

82.5 (55.9) (103.5) 269.1

(136.3) (102.8) 60.9 30.1

(135.2) 55.4 16.9 175.4

1,514.4

922.0

1,082.2

(400.8) (213.9) 11.6 (53.4) (0.9) (289.1) (946.5)

(185.9) 14.8 (46.3) 1.8 (215.6)

(282.8) 15.6 (28.7) (6.9) (302.8)

Nike,Inc.GAAPStatement ofCashFlows(cont.)

2004 Cash provided (used) by financing activities: Proceeds from long-term debt issuance Reduction in long-term debt including current portion Decrease in notes payable Proceeds from exercise of stock options and other stock issuances Repurchase of stock preferred Dividends - common and p Cash used by financing activities Effect of exchange rate changes Net increase in cash and equivalents Cash and equivalents, beginning of year Cash and equivalents, end of year Supplemental disclosure of cash flow information: Cash paid during the year for: Interest, net of capitalized interest Income taxes

Year Ended May 31, 2003 (In millions) 90.4 (55.9) (351.1) 44.2 (196.3) (137.8) ( ) (606.5) (41.4) 58.5 575.5 $ 634.00

2002

153.8 (206.6) (0.3) 253.6 (419.8) (179.2) ( ) (398.5) 24.6 194.0 634.0 $ 828.00

329.9 (80.3) (433.1) 59.5 (226.9) ( (128.9) ) (479.8) -28.1 271.5 304.0 $ 575.50

$ 37.80 418.6

$ 38.90 330.2

$ 54.20 262.0

DirectMethodforCashfromOperations
Cashinflows Cashoutflows =Cashfromoperations
Northrop Grumman Corp.
2001 Operating Activities Sources of cash Cash received from customers Progress payments Other collections Interest received Income tax refunds received Other cash receipts Cash provided by operating activities Uses of cash Cash paid to suppliers and employees Interst paid Income taxes paid Other cash payments Cash used in operating activities Net cash provided by operating activities 2002

3 102 3,102 11,148 17 23 244 14,534 13,251 333 126 7 13,717 817

1,438 1 438 7,003 17 15 10 8,483 7,250 165 57 1 7,473 1,010

ProblemswiththeStandardStatement
2. Transactionsinfinancialassetsareincludedintheinvestments sectionratherthaninthefinancingsection 3. Cashinterestisincludedintheoperating p gratherthaninthe financingsection 4. Taxcashflowsareallincludedintheoperatingsection,andnot allocatedtooperatingandfinancing 5. Thestatementdoesnotincorporatenoncashtransactions

1. Changeinoperatingcashshouldbeincludedintheinvestment section,andthechangeincashequivalentsinthefinancingsection

1.Operating CashandCashinFinancial Assets:Nike

Change in cash and cash equivalents

$194 million

Increase in operating cash Increase in financial assets

$ 8 million 186 $194 million

The determination of operating cash: use a normal percentage of sales for the industry

See Nikes reformulated balance sheet in Exhibit 9.3 in chapter 9.

5.NoncashTransactions
Acquisitionswithshares Assetexchanges Assetsacquiredwithdebt Capitalizedleases Installmentpurchases Debtconvertedtoequity

TheReformulatedStatementofCash Flows:theAdjustments
GAAP Free Cash Flow + Net cash interest outflow (after tax) + Investments in financial assets - Sale of financial assets - Noncash investments - Increase in operating cash = Free Cash Flow

GAAP Financing Flow + Net cash interest outflow (after tax) - Noncash financing + Purchase of financial assets - Sales of financial assets + Increase in cash equivalents = Financing Cash Flow