Free Cash Flow & Ratios (19.4) Flashcards
Define free cash flow
Free cash flow is a measure of cash that is available for discretionary purposes. This is the cash flow that is available once the firm has covered its capital expenditures. This is a fundamental cash flow measure and is often used for valuation.
what are the two most common measures of free cash flow
There are several measures of free cash flow. Two of the more common measures are free cash flow to the firm and free cash flow to equity.
Calculate free cash flow to the firm
Free cash flow to the firm (FCFF) is the cash available to all investors, both equity owners and debt holders. FCFF can be calculated by starting with either net income or operating cash flow.
FCFF is calculated from net income as:
FCFF = NI + NCC + [Int × (1 − tax rate)] − FCInv − WCInv
FCFF can also be calculated from operating cash flow as:
FCFF = CFO + [Int × (1 − tax rate)] − FCInv
where:
NI = net income
NCC = noncash charges (depreciation and amortization)
Int = cash interest paid
FCInv = fixed capital investment (net capital expenditures)
WCInv = working capital investment
calculate free cash flow to equity
Free cash flow to equity (FCFE) is the cash flow that would be available for distribution to common shareholders. FCFE can be calculated as follows:
FCFE = CFO − FCInv + net borrowing
where:
CFO = cash flow from operations
FCInv = fixed capital investment (net capital expenditures)
net borrowing = debt issued – debt repaid
What are the 5 performance ratios
cash flow-to-revenue, cash return-on-assets, cash return-on-equity, cash-to-income, & cash flow per share
Define & calculate cash flow-to-revenue ratio
The cash flow-to-revenue ratio measures the amount of operating cash flow generated for each dollar of revenue.
cash flow-to-revenue=CFO / net revenue
Define & calculate cash return-on-assets ratio
The cash return-on-assets ratio measures the return of operating cash flow attributed to all providers of capital.
cash return-on-assets=CFO / average total assets
Define & calculate cash return-on-equity ratio
The cash return-on-equity ratio measures the return of operating cash flow attributed to shareholders.
cash return-on-equity=CFO / average total equity
Define & calculate cash-to-income ratio
The cash-to-income ratio measures the ability to generate cash from firm operations.
cash-to-income=CFO / operating income
Cash flow per share is a variation of basic earnings per share measured by using CFO instead of net income.
cash flow per share = (CFO – preferred dividends) / weighted average number of common shares
What are the 6 coverage ratios
debt coverage, interest coverage, reinvestment, debt payment, dividend payment, investing & financing
define & calculate the debt coverage ratio
The debt coverage ratio measures financial risk and leverage.
debt coverage= CFO / total debt
define & calculate the interest coverage ratio
The interest coverage ratio measures the firm’s ability to meet its interest obligations.
interest coverage= (CFO + interest paid + taxes paid) / interest paid
define & calculate the reinvestment ratio
The reinvestment ratio measures the firm’s ability to acquire long-term assets with operating cash flow.
reinvestment= CFO / cash paid for long-term assets
define & calculate the debt payment ratio
The debt payment ratio measures the firm’s ability to satisfy long-term debt with operating cash flow.
debt payment=CFO / cash long-term debt repayment
