The values of ebitda for the three years are $38,000 for 2004, $48,790 for 2005 and $63,840 for 2006. Free cash flow had two optional definitions. One definition was the cash flow from operations minus the capital spending. The second definition was the cash flow from operations minus the capital spending and minus dividends (Almeida, Campello & Weisbach 3). The table below displays the free cash flow for Meriden Products for the three years.
Cash flow from operation shows positive values less than the values of free cash flows for the three years. Free cash flow for the three years shows a positive incremental growth as years go by. All the values of ebitda are greater than the cash flow from operations through the three years.
For the pessimistic scenario, the calculation of ebitda and free cash flow remains the same as in the previous calculations. The formula for ebitda will be ebitda=net income + depreciation and the formula for free cash flow is cash flow from operation less capital spending. The table below contains the results.
Ebitda
Free Cash Flow
For the pessimistic scenario, the ebitda value for the first year equals that of the corresponding cash flow from operations, and for the remaining two years, ebitda is less than the cash flow from operations. Cash flows from operation values are less than the free cash flows for the three years. Free cash flow for the three years shows a positive incremental growth.
The use of ebitda has both advantages and disadvantages which the table below shows.
The use of free cash flow poses advantages and disadvantages as the table below indicates.
If I were Jim, I would tell the president that pro-forma figures would require too much disclosure of sensitive and confidential information to third parties, such as the investor, about the firm’s financial performance (McDonald 1777). I would convince him that there is no need for pro-forma numbers.
Works Cited
Almeida, Heitor., Murillo Campello & Michael Weisbach. Cash Flow Sensitivity. New York: New York University. 2004. Print.
McDonald, Robert. Cash Flow from Operations- Do We Need Any Other Cash Flow Terms? Chicago: University of New Haven, 2010. Print.