Question

1. Compare and contrast Free Cash Flow, Cash Flow (balance sheet to balance sheet) and CFO (6 points)

Answer 1

Free cash flow (FCF)

Free cash flow is one way of measuring profitability of a firm, and represents the cashflow that a company generates to its share holders and debt holders after considering the cash outflows for operations and capital expenditures. There are basically 2 types of FCF, Free cash flow to firm and Free cashflow to equity

FCF= EBIT*(1-tax rate)+depreciation & Amortization -increase in working capital-capex

Cashflow:

Cashflow or net cashflow is the difference of total cash inflows and total cash outflows. It shows at the end of an accounting period, how much cash the company has added to its balance sheet or reduced from its balance sheet.

Cashflow= total cash inflows-total cash outflows = cash flow from operation+cashflow from financing+cashflow from investing

CFO: Cashflow from operation:

CFO represents the total cashflow obtained by a company's operations. Unlike net income, it shows the actual amount of cash that a company generates through its pure operating activities.

CFO= net income+Depreciation & amortization- increase in working capital

---- we can use CFO to calculate FCF of a company by the below equation;

FCF=CFO+interest expense-tax shield on interest-capex