Free cash flow, operating asset compared to financial asset
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1. Why can free cash flow be regarded as a dividend, that is, as a distribution of value rather than the value created?
2. How can a firm pay a dividend with zero free cash flow?
3. Distinguish an operating asset from a financial asset.
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Solution Summary
The response provides you a structured presentation of free cash flow, dividends, and operating assets. It also gives you the relevant references.
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1. Free cash flow can be regarded as a dividend, that is a distribution of value rather than value created because FCF measures the financial performance of a company. It is found by subtracting operating cash flow fewer capital expenditures. It is the cash that a company can generate after spending the money required to maintain or increase its asset base. The FCF can be considered to be a dividend from the operating activities to the financing activities. CFC, if positive increases money in the hand of the firm. This means balance in banking accounts, checks, or any form of currency that is easily accessible and can be turned to physical cash increases. The operating activities of the firm generate a net cash payout from operations that is invested in financing activities. A part of the value generated by operations is distributed in the form of a dividend, the remaining part of the value generated is again invested in operating assets. From a different point of view, if the operations generate a positive cash flow and investment in operating activities or financing activities is deducted from it, the remaining cash flow is paid as dividend. Free cash flow can be regarded as dividend because the source of FCF may not be operating activities alone(1). The FCF may be generated by financing activities. Similarly, the cash generated by operating ...
Education
- BSc , University of Calcutta
- MBA, Eastern Institute for Integrated Learning in Management
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