E10.3. Analyzing Cash Flows (Medium) Consider the following comparative balance sheets for the Liquidity Company: Operating cash December 31 2008 2007 $ 435,000 $ 50,000 40,000 -0- 100,000 400,000 200,000 -0- 800,000 200,000 (100,000) -0- Inventories Accounts receivable Land (unamortized cast) Plant assets Less: accumulated depreciation Accounts payable Capital stock 1,075,000 25,000 1,050,000 $1,075,000 1,050,000 0- 1,050,000 $1,050,000 The company paid a dividend of $150,000 during 2008 and there were no equity contribu tions or stock repurchases.

a. Calculate free cash flow generated during 2008.

b. Where did the increase in cash came from?

c. How would your calculation in part

(a) change if the firm invested in short-term deposits rather than paying a dividend?