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CMA Intermediate · Financial Management and Business Data Analytics · Cash Flow Statement - Preparation and Analysis

Meenakshi Foods Ltd has operating cash flow of ₹15,00,000, capital expenditure of ₹6,00,000 on plant, interest paid of ₹2,00,000 classified under financing activities, and dividends paid of ₹3,00,000. Free cash flow is defined as operating cash flow less capital expenditure. The company also has total debt of ₹30,00,000. What is the ratio of free cash flow to total debt?

The ratio is 0.30. Free cash flow equals operating cash flow of ₹15,00,000 minus capital expenditure of ₹6,00,000, which is ₹9,00,000. Dividing by total debt of ₹30,00,000 gives 0.30, because interest and dividends are not deducted under the stated definition.

  1. A0.20
  2. B0.30Correct
  3. C0.50
  4. D0.10

Explanation

Free cash flow = 15,00,000 - 6,00,000 = 9,00,000. Dividing by debt 30,00,000 gives 0.30. The 0.20 option wrongly deducts interest and dividends too (4,00,000... actually 4,00,000/30,00,000 is not that), it arises from deducting extra items; 0.50 uses operating cash flow alone.

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