Author Question: Define cash flow adequacy and the importance of this ratio to credit rating agencies. What will ... (Read 104 times)

faduma · **on:** Jul 6, 2018

Define cash flow adequacy and the importance of this ratio to credit rating agencies.

What will be an ideal response?

Question 2

Each employer subject to the federal unemployment tax must file an annual return and pay the unpaid portion of the tax by January 31 of the following year.
Indicate whether the statement is true or false

ky860224 · **Reply #1 on:** Jul 6, 2018

Answer to Question 1

Credit rating agencies often use cash flow adequacy ratios to evaluate how well a company can cover annual payments of items such as debt, capital expenditures, and dividends from operating cash flow. Cash flow adequacy is generally defined differently by analysts; therefore, it is important to understand what is actually being measured. Cash flow adequacy in the textbook measures a firm's ability to cover capital expenditures, debt maturities, and dividend payments each year. Companies over the long run should generate enough cash flow from operations to cover investing and financing activities of the firm. If purchases of fixed assets are financed with debt, the company should be able to cover the principal payments with cash generated by the company. A larger ratio would be expected if the company pays dividends annually because cash used for dividends should be generated internally by the company, rather than by borrowing. Borrowing each year to pay dividends and repay debt is a questionable cycle for a company to be in over the long run.

Answer to Question 2

T