See Also: Free cash flows(money)
Free cash flows(finance)
Statement of Cash Flows(money)
Scheduled cash flows(money)
Non-operating cash flows(finance)
Scheduled cash flows(finance)
Statement of Cash Flows(finance)
Incremental cash flows(money)
Incremental cash flows(finance)
Expected future cash flows(money)

Free cash flows (money)


Definition: [crh] Cash not required for operations or for reinvestment. Often defined as earnings before Definition: ">interest (often obtained from the operating income line on the income statement) less capital expenditures less the cDefinition: hange in working capital. In terms of a formula:



Free cash flows =



Sales (Revenues from operations)

- COGS (Cost of Definition: goods sold-labor, material, book depreciation)

- SG&A (Selling, general administrative costs)

EBIT (Earnings before interest and taxes or Operating Earnings)

- Taxes (CaDefinition: sh taxes)

EBIAT (Earnings before interest after taxes)

+ DEP (Book depreciation)

- CAPX (Capital expenditures)

- ChgWC (Change in workinDefinition: g capital)

C (Free cash flows)



There is an issue as to whether you want to define the FCFs to the firm as a whole (the cash flow tDefinition: o all of its security holders), or the FCFs only to the firm's equity holders. For firm valuation, you want the former; for Definition: ck">stock valuation you want the latter.

To value the firm, calculate the stream of FCFs to the firm and discount this stream by the firm's WACC (Definition: al">Weighted average cost of capital). This will give you the value of a levered firm, including the tax benefits of debt financing. AlteDefinition: rnatively, you can discount the firm's FCFs by its unlevered cost of capital and add separately the present value of the tax benefiDefinition: ts.

To value the firm's equity, you can either take the above number and subtract the market value of all outstanding Definition: =debt">debt (liabilities) or you can calculate the FCFs to the firm's equity holders and discount this stream by the firm's levered equity cost of capital.

NotDefinition: ice that changes in working capital have the same effect on free cash flows as do changes in physical capital, i.e., capital expDefinition: enditures. For example, suppose you had to spend $XX to increase the capacity of your plant. This expenditure would be a reduction in free cash flow in the year it was made. Likewise, if you had toDefinition: increase the level of your cash balance, inventory or receivables by $XX to accommodate greater sales, then this too would result in a like rDefinition: eduction in free cash flows in the year the level of working capital was increased. [Definition and discussion courtesy of Professor Michael Bradley.]