Evaluating Statements on Free Cash Flow

In equity valuation, analysts often use free cash flow (FCF) models to assess the value of a company's equity. Free cash flow represents the cash generated by a company that is available for distribution to its security holders after all operating expenses, taxes, and necessary investments in fixed capital have been paid.

Consider the following three statements regarding the calculation of free cash flow:

1. Free cash flow is calculated as operating cash flow minus capital expenditures.
2. Free cash flow is equal to net income plus depreciation and amortization minus changes in working capital.
3. Free cash flow can be used to determine a company's enterprise value by discounting future free cash flows to present value.

Which of the statements is correct?