Free cash flow is defined as
A) Cash flows available for payments to stockholders of a firm after the firm has made payments to all others will claims against it.
B) Cash flows available for payments to stockholders and debt holders of a firm after the firm has made payments necessary to vendors.
C) Cash flows available for payments to stockholders and debt holders of a firm after the firm has made investments in assets necessary to sustain the ongoing operations of the firm.
D) Cash flows available for payments to stockholders and debt holders of a firm that would be tax-free to the recipients.

Question

Quizplus · Accepted Answer

Free cash flow is the amount of cash generated by a business that is available for distribution to its investors after necessary investments have been made to maintain or expand operations. It is the cash flow that is available to both debt and equity holders of a firm after accounting for capital expenditures required to maintain current asset base. Therefore, option C is the correct definition of free cash flow. Options A and B are incorrect as they do not take into account necessary investments in the form of capital expenditures. Option D is incorrect as tax implications are not a determining factor in the calculation of free cash flow.

Free Cash Flow Is Defined as