CFA Level I · CFA Level I Exam · Analyzing Statements of Cash Flows II
An analyst wants to estimate the cash flow available to all capital providers of a company after operating expenses, taxes and investment in working capital and fixed capital. Which measure is most appropriate?
Free cash flow to the firm is the most appropriate measure. It is the cash generated after taxes, working capital and capital expenditure that is available to all capital providers, both debtholders and shareholders, before any financing flows are considered.
- AFree cash flow to equity
- BFree cash flow to the firmCorrect
- CNet income plus depreciation
Explanation
FCFF is the cash flow available to all providers of capital (debt holders and equity holders) after operating costs, taxes, working capital and capital expenditure. FCFE is only the portion available to shareholders after debt payments. Net income plus depreciation ignores capital investment and working capital.
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