Which of the following statements is CORRECT?
A) A shortcut to calculate free cash flow (FCF) is defined as follows:
FCF = Net income + Depreciation and Amortization.
B) Changes in working capital have no effect on free cash flow.
C) Free cash flow (FCF) is defined as follows:
FCF = EBIT(1 − T)
+ Depreciation and Amortization
− Capital expenditures required to sustain operations
− Required changes in net operating working capital.
D) Free cash flow (FCF) is defined as follows:
FCF = EBIT(1 − T)+ Depreciation and Amortization + Capital expenditures.
E) Net cash provided (used) by operations is the same as free cash flow (FCF).

Question

Quizplus · Accepted Answer

Free cash flow (FCF) is defined as EBIT(1-T) + Depreciation and Amortization − Capital expenditures required to sustain operations − Required changes in net operating working capital. This equation takes into account the changes in working capital, capital expenditures required to sustain operations, and any necessary adjustments to net operating working capital. Option A is incorrect because Net income + Depreciation and Amortization is not the correct formula for calculating FCF. Option B is incorrect because changes in working capital do have an effect on FCF. Option D is incorrect because it does not take into account the necessary adjustments for changes in working capital. Option E is incorrect because net cash provided (used) by operations does not take into account capital expenditures required to sustain operations or changes in net operating working capital.

Which of the Following Statements Is CORRECT