Which of the following statements is CORRECT?
A) Net cash flow (NCF)is defined as follows:
NCF = 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 flow is the same as free cash flow (FCF).

Question

Quizplus · Accepted Answer

Free cash flow is defined as cash flow available for distribution to all investors after all operating expenses, taxes, required investments in working capital, and capital expenditures have been accounted for. Therefore, choice C is the only statement that correctly defines FCF by including all the necessary components. Choice A is incorrect because it only includes depreciation and amortization, which are non-cash expenses. Choice B is incorrect because changes in working capital have a significant impact on free cash flow. Choice D is incorrect because it does not subtract the required changes in net operating working capital. Choice E is incorrect because net cash flow is not the same as free cash flow.

Which of the Following Statements Is CORRECT