Free Cash Flow

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Free cash flow In corporate finance, free cash flow (FCF) is cash flow available for distribution among all the securities holders of an organization. They include equity holders, debt holders, preferred stock holders, convertible security holders, and so on. G. Bennett Stewart - the "economic model of value holds that share prices are determined by just two things: the cash to be generated over the lifetime of a business and the risk of the cash receipts”. GSB (1990), “The Quest for Value” FCF is the cashflow generated by a company’s operations that is free, or net, of the new capital invested for growth. Imagine all a company’s cash receipts are deposited in a cigar box, and that all of its cash operating outlays are taken…show more content…
The first is the accounting for the consumption of capital goods. The Net Income measure uses depreciation, while the Free Cash Flow measure uses last period 's net capital purchases. Measurement Type | Component | Advantage | Disadvantage | Free Cash Flow | Prior period net investment spending | Spending is in current dollars | Capital investments are at the discretion of management, so spending may be sporadic. | Net Income | Depreciation charge | Charges are smoothed, related to cumulative prior purchases | Allowing for typical 2% inflation per year, equipment purchased 10 years ago for $100 would now cost about $122. With 10 year straight line depreciation the old machine would have an annual depreciation of $10, but the new, identical machine would have depreciation of $12.2, or 22% more. | The second difference is that the Free Cash Flow measurement deducts
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