Lockheed Martin Corporation is a well-known producer of advanced aircraft, missiles, and space hardware. Lockheed Martin is most famous for its super-secret research and development division, nicknamed the Skunk Works. Among the high-tech aircraft developed at the Skunk Works are the SR-71 Blackbird spy plane and the F-117A Stealth fighter.

The consolidated statement of cash flows from Lockheed Martins 2011 annual report is reproduced on the next page. When investors and analysts use the term cash flow, they can mean a variety of things. Some common definitions of cash flow are as follows:

(a) Net Income + Depreciation

(b) Cash flow from operating activities

(c) Cash flow from operating activities + Cash paid for interest + Cahs paid for income taxes

(d) Cash flow from operating activities - Capital expenditures - Dividends

1. Using the data from Lockheeds statement of cash flows, compute values for the four measures of cash flow defined above for 2009, 2010, and 2011. Use net earnings as net income. For capital expenditures, use expenditures for property, plant, and equipment.

2. One of the definitions (a) through (d) is sometimes given the title free cash flow because it indicates the amount of discretionary cash generated by a business. Free cash flow is thought of as the amount of cash that an owner can remove from a business without harming its long-term potential. Which of these four definitions do you think applies to free cash flow? Explain.

3. A leveraged buyout (LBO) is the purchase of a company using borrowed money. The idea behind an LBO is to borrow the money, buy the company, and then repay the loan using the cash flow generated by the purchased company. Which of the four definitions of cash flow do you think would be particularly useful to someone considering an LBO? Explain.