What does a negative value for unlevered free cash flow imply for the claimants of a firm? Management is doing a bad job The firm must raise capital from the capital markets (e. g., debt, equity), or liquidate internal assets (e. g., cash) Revenues are less than costs Shareholders have made a bad investment The firm is overinvesting

Question

Business

Evie

7 September, 04:37

What does a negative value for unlevered free cash flow imply for the claimants of a firm? Management is doing a bad job The firm must raise capital from the capital markets (e. g., debt, equity), or liquidate internal assets (e. g., cash) Revenues are less than costs Shareholders have made a bad investment The firm is overinvesting

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Jamya Mccormick · Answer 1

If free cash flow is negative, then firm cannot use debt capital.

Explanation:

It's a fund which has been borrowed. You must pay interest on debt capital regardless of its profitability. If free cash flow is negative, interest can not be paid if due. The only way to fund the company is through equity issuance. Because of its low risk, debt capital is less risky than equity capital. As a result, the oporrtunity to use a low cost outlet is being missed due to negative cash flow. Thus there is no chance of maximizing income per share. Unless the situation is changed, organization must stay unlevered.

To solve the crisis, the organization must use its much-needed cash. The existing liquidity state will be affected. The shortage of human resources will rising. At any time, the production may be halted because of the lack of funds.

Because the sum is not adequate to pay shareholders, it may be viewed by investors as a poor investment if the situation does not improve temporarily and in the future.