Cash Flow Adequacy On its most recent statement of cash fl ows, a company reported net cash provided by operating activities of $12,000,000. Its capital expenditures for the same year were

$2,000,000. A note to the fi nancial statements indicated that the total amount of debt that would mature over the next fi ve years was $20,000,000.

Required 1. Compute the company’s cash fl ow adequacy ratio.

2. If you were a banker considering loaning money to this company, why would you be interested in knowing its cash fl ow adequacy ratio? Would you feel comfortable making a loan based on the ratio you computed in (1)? Explain your answer.

Multi-Concept Exercises AppendixLO1