Understanding Free Cash Flow

Very Easy Equity Valuation Techniques Free Cash Flow Models

In equity valuation, free cash flow models are commonly used to estimate the value of a company. Free cash flow (FCF) is the cash generated by a company's operations that is available for distribution to all providers of capital. When using a free cash flow model, an investor typically forecasts the company's FCF for a certain number of years and then discounts these cash flows back to their present value.

Which of the following statements best describes free cash flow (FCF)?

Free cash flow is net income plus depreciation.

Free cash flow is the cash available to pay dividends to shareholders.

Free cash flow represents the cash that a company can generate after laying out the money required to maintain or expand its asset base.

Hint

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