In: Finance
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6. Free cash flow Accounting statements represent a company’s earnings, but this is not the real cash that a company generates. Earnings data can be manipulated and can be deceiving. Thus, corporate decision makers and security analysts focus on the free cash flow that a firm generates to analyze the company’s real cash position. Which of the following statements best describes free cash flow? Cash flows generated by operating the business Residual cash flow after taking into account operating cash flows, including fixed-asset acquisitions, asset sales, and working-capital expenditures Suppose you are the only owner of a chain of coffee shops near universities. Your current cafés are doing well, but you are interested in starting a fine-dining restaurant. You decide to use the cash generated from your existing business to enter into a new business. Your accountant provides you with the following data on your current financial performance: Financial update as of June 15
Based on your evaluation you have in free cash flow. Free cash flow can be used for various reasons, including distributing it to stockholders and debtholders. Which of the following is not a use of free cash flow? Acquiring operating assets Distributing dividends to stockholders |
The statement that describes what Free Cash Flow is (FCF) is: |
Residual cash flow after taking into account operating cash flows, including fixed-asset acquisitions, asset sales, and working-capital expenditures |
FCF is the balance amount available to both debt & equity holders. |
It's formuls is |
FCF=EBIT*(1-Tax rate)+depn. & Amortisations+/- Net change in Fixed Assets+/- Changes to Net Working capital |
For the given case, |
FCF =(111000*(1-25%))+21143-16650-(8880-5550) |
84413 |
So, |
Based on the above evaluation we have $ 84413 in free cash flow. |
Acquiring operating assets |
is NOT a use of FCF |
as FCF is that cash available to the business cash after meeting operating expenses & asset purchases . |
This cash is used for repayment of debts, distribution of cash dividends to stockholders, business expansion or stock re-purchase---ie. Meant for all financing activities only. |