Essay: Free Cash Flows and Investment Decisions

Essay: Free Cash Flows and Investment Decisions
April 11, 2011 Comments Off on Essay: Free Cash Flows and Investment Decisions Academic Papers on Business Studies,Sample Academic Papers admin

Sample Essay

The free cash flow slightly differs from the net cash flow of a company. The net cash flow of a company is calculated by including the non-cash adjustments in the net income of the company. Brigham and Ehrhardt (2001) defined free cash flow as: “The cash flow actually available for distribution to investors after the company has made all the investments in fixed assets and working capital necessary to sustain ongoing operations” (p.46). Free cash flow is the remaining amount of cash after the company has generated and used the fixed assets in operating and investing activities. This cash flow is available to be distributed to shareholders or to be invested in projects for generating higher cash flows in the future.

Earnings before Interest Taxes Depreciation and Amortization – EBITDA is sometimes used in place of the free cash flows to evaluate investment decisions but EBITDA is quite different from free cash flows and does not provide a true reflection of the free cash flows as it includes the non-cash items in earnings, does not account for cash requirements in the working capital and does not include the cash expenditure required for capital investments. The free cash flows thus have to be calculated by implementing all these components of noncash items, cash requirements in the working capital and cash requirement for fixed assets (Christy 2006).

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