Final answer:
Cash flow from assets, to creditors, and to stockholders in a company with many shareholders are concerned with financing operations and returning value to investors. Financial capital contributes to profits and can come from various sources, with firms weighing the costs and benefits of each. Financial inflows and outflows are reflected in the current account balance and have implications for a country's economic standing.
Step-by-step explanation:
Understanding Cash Flows and Financial Capital in Corporations
For the year 2021, to calculate the cash flow from assets, one needs to assess three main components: operating cash flow, capital spending, and changes in net working capital. Cash flow to creditors and cash flow to stockholders are parts of the cash flow from financing activities. The cash flow to creditors includes interest payments and net new borrowing, while the cash flow to stockholders includes dividends paid and net new equity raised.
In a company owned by many shareholders, money is obtained from sales of stock during equity financing rounds. The company promises a certain rate of return through dividends and stock price appreciation. Decision-making typically falls to a board of directors elected by the shareholders.
Financial capital is vital for corporations as it funds operations and growth, contributing to profits. Corporations can acquire it through borrowing (debt), issuing bonds, or selling stock (equity). The choice between these sources involves considering factors like the cost of capital, risk, current market conditions, and future cash flow projections.
Self-Check Questions Related to Financial Flows
If foreign investors buy more U.S. stocks and bonds, it would result in a financial inflow, reflected as a decrease in the current account balance.
An increase in the U.S. trade deficit typically worsens the current account balance because the nation is spending more on imported goods than it earns from exports.
Financial flows to the Mexican economy involve foreign investment into Mexico, while financial flows out of the Mexican economy involve Mexican investment abroad or spending on imports.