When Time, Inc., and Warner Communications merged, it represented one of the largest busi¬ ness combinations of all time. Since then the company has reported consistent net losses despite relatively strong operating cash flows. In its 1994 annual report Time Warner often emphasized EBITDA (Earnings before interest, taxes, depreciation, and amortization), noting several times that this number was a better measure of the companies performance than earnings. REQUIRED:

a. Explain how, after a large merger, the resulting company could report consistent net losses while also reporting strong and positive operating cash flows.

b. Why might the company view EBITDA as the best measure of its performance?

c. Time Warner holds a significant stake (19.6%) in Turner Broadcasting System, Inc. and regularly receives dividends from TBS. How do such dividends affect the reported profits and operating cash flows of Time Warner? Explain.