Answer to Question 2
It is possible, even highly probable under some circumstances for a company that has both a negative net income as well as a negative operating cash flow, to close the year with both an increase in cash and an increase in stock price. This will, however, be contingent upon the reasons behind the negative net income and the negative operating cost. The flow of money within a business is exponentially different from the flow of money within a household. This is because a household is all expenses but with a business, money properly spent means a potential for more money coming in. Therefore, the absence of money can mean that it has been properly invested into a process that will be very profitable for the company (Keown, Martin & Petty, 2014) . Under the circumstances, both cash and profits are bound to rise definitively.
Net income is the amount of revenue coming into a company at a moment in time, less the amount of money being spent by the company. A negative net income means that the money being spent by the company at that moment in time supersedes the amount of money being made (Keown, Martin & Petty, 2014) . It is possible that this means that the company is operating at a loss but not necessarily. For example, a supplier that has several credit arrangements for retailers can be having negative net income because the retailers have not paid for the goods yet. The supplier is spending on getting goods and supplying the retailers and also making a potential profit since the retailers are selling. This is just one of the many scenarios where a negative net income can be recorded even when the business is very healthy from an overall perspective.
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Cash flow, on the other hand, is closely related to income and denotes the amount of money currently available in the business to take care of expenses (Keown, Martin & Petty, 2014) . Cash flow pays wages, taxes, making purchases, among other uses. A negative cash flow means that there is a mismatch between expenditure and income. This may mean that the company is undergoing a moment of too much expenditure or that there is some fraud and/or misappropriation of funds. A company cannot operate properly with a negative cash flow and it may be necessary to obtain financing to cure the negative cash flow. This can be achieved through an overdraft facility, loan, or an other financing regimen .
The instant question combines two negatives that may still lead to two positives. The two negatives are negative net income and negative cash flow while the two positives are an increased in cash and increase in stock price. If the two negatives have been caused by a solid investment that will eventually lead to massive profits, the impending profits will trigger a desire for the stock of the company. Stock operate under the same rules of demand and supply, thus an increase in demand will lead to increased stock prices (Keown, Martin & Petty, 2014) . A good financial instrument will lead to increase in cash leading to a combination of higher stock prices as well as higher income. From a different perspective, the negative net income and negative cash flow could also come towards the end of the year because the company has decided to pay a hefty dividend. Dividends also take cash away from the business and may, therefore, result in both a negative net income and a negative cash flow. The company will be illiquid but its stocks will be in very high demand as happens whenever a good dividend is paid (Keown, Martin & Petty, 2014) . The high demand will lead to higher stock prices. The fact that the stock is doing well will also attract financiers, who will cure the cash flow problem, leading to increased cash.
References
Keown, J., Martin, D. & Petty, W. (2014). Foundations of Finance: The Logic and Practice of Financial Management. 8th Edition. Upper Saddle River, NJ: Prentice Hall.
