Question

What are free cash flows for a firm? Describe the steps of estimating free cash flows of a firm. What does it mean when a firms cash flow is negative? Explain with examples

Answer 1

Free cash flows for the company is a free cash which has been generated to all the funding providers who are including debt holders, prefered stakeholders, common stakeholders.

it is also representing the surplus cash flows which is available to the business if it was debt free and it is a important part in finding the intrinsic value of a company.

Steps for estimating free cash flows for the firm be as follows-

A. We will be having to arrive at net operating profit after tax.

B. We will have to adjust the net operating profit after cash with depreciation and amortization by adding the depreciation and amortization

C. We will have to deduct the capital expenditure and the net working capital from Sum of NOPAT and depreciation and amortization.

So we will be arriving at free cash flows for the companies after doing these steps.

when the free cash flows for the company will be negative it will mean that the company is not able to operate in a surplus cash and business is a spending more money than it is making during a specified period.

for example we can take that when the company is expanding higher amount of capital expenditure it will be having a more probability of having lower cash flows which are freely available to the firm.