Which of the following statements is CORRECT?
A) Most rapidly growing companies have positive free cash flows because cash flows from existing operations generally exceed fixed asset purchases and changes to net operating working capital.
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
- 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)+ Capital expenditures.
E) Managers should be less concerned with free cash flow than with accounting net income.Accounting net income is the "bottom line" and represents how much the firm can distribute to all its investors-both creditors and stockholders.

Question

Quizplus · Accepted Answer

Free cash flow (FCF) is a measure of a company's financial performance that shows how much cash is available for the company to repay creditors or pay dividends and interest to investors. The correct definition of FCF includes earnings before interest and taxes (EBIT) adjusted for taxes, plus depreciation (which is a non-cash expense), minus capital expenditures required to sustain operations, and minus required changes in net operating working capital. This formula captures the true cash generating ability of a company, beyond just its net income or earnings.

Which of the Following Statements Is CORRECT