Case Study: Amazon.com

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Please find the free cash flow analysis in the attached file.

Running Head: STOCK PRICE

Free Cash Flow Analysis

Answer (a)
Free cash flows are calculated by the following formula -
Net income
+ Depreciation
+ Change in working capital
- Capital expenditure
= Free cash flows
(Mun, 2006).
Add back of depreciation and inclusion of change in working capital is equal to the cash from operational activities of the business. Thus, to calculate free cash flows of Amazon.com we would use the following formula as cash flow provided by operation is given, which depicts that adjustment for depreciation and change in working capital has been made already-
Cash flow from operation
- Capital expenditure
= Free cash flow
Calculation of Free Cash Flow
($ in millions) 2003 2002
Cash from operations 392 174
Less: Capital expenditure 46 39
Free cash flow 346 135
The free cash are the cash flows, which depicts the internally generated cash flow of an organization. The net income of the business is negative for year 2002 and quite less for year 2003 but the cash provided by operation is increasing continuously. An increase in free cash flow after deducting capital expenditure exhibits an increase in the ability to finance the expansion plan. ...