E4.10. Free Cash Flow for General Motors (Medium) For the first nine months of 2005, General Motors Corporation reported the following in its cash flow statement. GM runs an automobile operation supported by a financing arm, and both activities are reflected in these statements. Condensed Consolidated Statements of Cash Flows (unaudited) Nine Months Ended September 30 2005 (dollars in millions) 2004 Net cash provided by operating activities $ 3,676 $ 12,108 Cash flows from investing activities: Expenditures for property (5,048) (4,762) Investments in marketable securities--acquisitions (14,473) (9,503) Investments in marketable securities-iquidations 16,091 10,095 Net originations and purchases of mortgage servicing rights (1,089) (1.151) Increase in finance receivables (15,843) (31,731) Proceeds from sales of finance receivables 27,802 16.811 Operasing leases-acquisitions (12,372) (10,522) Operating leases-quidations 5,029 5,831 Investments in companies, net of cash acquired 1,367 (85) Other Net cash (used in) investing activities (1,643) 808 5 (179) $124,2091 Net interest paid during the 2005 period was $4,059 million, compared with $3,010 million in the corresponding 2004 period. General Motors' tax rate is 36%. An analyst made a calculation of free cash flow from these numbers as follows (in millions): 2005 2004 Cash flow from operations $3,675 $ 12,108 Cash flow in investing activities (179) (24,209) Free cash flow $3,497 5/12 101) She opened her report to her clients, written the day after GM's third quarter report was published, with the words, "GM has dramatically increased its free cash flow. As a result, we are edging towards upgrading our recommendation from SELL to HOLD." Calculate the appropriate free cash flow number for the two nine-month periods. What mistakes is the analyst making in suggesting that the increase free cash flow is good news? Real World Connection See Exercises E2.12 and E5.16.