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Free Cash Flow / NOPAT

OTA,

Request to elaborate (in your own words, thoughts, perspectives) regarding the following in 200 words or more to provide in-depth understanding .

A) I realize free cash flow (fcf) is basically cash flow actually attainable for distribution to a shareholder after the firm has made all the investments in their fixed assets and working capital needed to continue their ongoing operations. I see that it is most important measure of cash flow since it is the cash that is actually available for distribution.

Can you provide more information in your own words about free cash flow (fcf)?

B) I see that NOPAT (Net Operating Profit After Taxes) is the net operating profit after taxes and this essentially excludes only the cost of financing the business. Net Income includes interest and dividend expenses. Yes, I realize NOPAT would be considered a better measure of the performance of an organization's operations. From a shareholder's view, cost of capital and its effect on net income is of importance.

Can you provide more information in your own words about NOPAT (Net Operating Profit After Taxes)?

Solution Preview

Thank you for your posting.

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A) I realize free cash flow (fcf) is basically cash flow actually attainable for distribution to a shareholder after the firm has made all the investments in their fixed assets and working capital needed to continue their ongoing operations. I see that it is most important measure of cash flow since it is the cash that is actually available for distribution.

Can you provide more information in your own words about free cash flow (fcf)?

If we start with the basic objective of financial management - it is to maximize shareholder wealth. Shareholder wealth is measured as # of shares X market price per share. The market price of a company is dependant on the valuation of the company. The valuation of any asset is the present value of the cash flows. For a firm the measure to use is the free cash flow and the value of a company is present value of free cash flows. To maximize shareholder wealth we need to focus on increasing the free cash ...

Solution Summary

The solution explains the concept of free cash flow and NOPAT

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