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The Concept of Free Cash Flow - Essay Example

Summary

The paper "The Concept of Free Cash Flow" helps to understand the concept one must ask what is the company's discretionary cash flow each year. Discretionary cash flow means after paying for expenses for the business and paying working capital and capital expenditures how much money is available…

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Subject: Finance & Accounting
Type: Essay
Level: Undergraduate
Pages: 1 (250 words)
Downloads: 2
Author: marlen09

Extract of sample "The Concept of Free Cash Flow"

After evaluating the free cash flow the company has to find ways to fix the problem. An option is raising capital through the sale of stocks. It can restructure or change its business policies. Investing and financing charges are excluded from the calculation of free cash flow. These expenses are a way to fund the business operations and are not needed as part of doing business regularly.

The best and simplest formula to calculate the metric is cash from operations minus capital expenditure. It is important for companies to generate healthy free cash flow. Free cash flow is used to analyze companies through the application of additional financial tools such as discounted cash flow analysis, leveraged buyout analysis, or standalone analysis. It is important to see if a company's free cash flow is growing each year and the rate of growth. The reasons for the growth or change are also important.

Additional cash flow obtained from greater sales is a positive sign. Greater cash flow from cost-cutting is not a sustainable strategy.

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