Question #56

Concern 1: He is correct that declines in inventory give one off boosts to cash flow from operations and hence free cash flow. In addition, it is unlikely that Fishy Discs inventory will decline in future periods given we are expecting growth of 12% in the near term. Concern 2: The corporate finance firm are using a three-stage model with declining growth after four years. The model takes six years for growth to decline to sustainable levels. Given that Fishy Discs will lose its exclusivity agreement with the U.S. producer in four years, it is likely that the decline in growth will be far more rapid. Once barriers to entry are removed growth will decline from 12% to 4% far more rapidly than is being modelled. For companies that sustain economic profit due barriers to entry such as patents, copyrights and other agreements using a two stage model may model the decline in growth due to an influx in competition more accurately.