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CFA Level I · CFA Level I Exam · Analyzing Statements of Cash Flows II

A company has cash flow from operations of 900, interest paid of 60 and income taxes paid of 140 (both already deducted in arriving at operating cash flow), and capital expenditures of 300. Dividends paid are 100. Under IFRS, the company's cash flow to total debt ratio is 0.30 for total debt of 3,000. Its capital expenditure coverage ratio is closest to:

The capital expenditure coverage ratio is cash flow from operations divided by capital expenditures: 900 divided by 300 equals 3.0. Dividends, interest and taxes should not be adjusted, since interest and taxes are already deducted in operating cash flow here.

  1. A2.0
  2. B3.0Correct
  3. C3.5

Explanation

Capital expenditure coverage ratio = CFO / capital expenditures = 900/300 = 3.0. Subtracting dividends first (800/300 = 2.7) or adding back interest and taxes (1,100/300 = 3.7) is wrong. Debt ratio check: 900/3,000 = 0.30, consistent.

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