Question

Suppose you are the only owner of a chain of coffee shops near universities. Your current cafés are doing well, but you are interested in starting a fine-dining restaurant. You decide to use the cash generated from your existing business to enter into a new business. Your accountant provides you with the following data on your current financial performance: • Your existing business generates $75,000 in EBIT. • The corporate tax rate applicable to your business is 25%. • The depreciation expense reported in the financial statements is $14,286. . You don't need to spend any money for new equipment in your existing cafés, however, you do need $11,250 of additional cash. . You also need to purchase $6,000 in additional supplies--such as tableclothes and napkins, and more formal tableware-on credit. It is also estimated that your accruals, including taxes and wages payable, will increase by $3,750. Based on your evaluation you have $63,036 in free cash flow. use of free Free cash flow can be used for various reasons, including distributing it to stockholders and debtholders. Which of the following is not cash flow? O Distributing dividends to stockholders Acquiring operating assets Save & Continue Continue wthout saving

Answer 1

Free cash flow (FCF) is a measure of how much cash a business generates after accounting for capital expenditures such as buildings or equipment. This cash can be used for expansion, dividends, reducing debt, or other purposes.

FCF = Operating Cash Flow - Capital Expenditures

The presence of free cash flow indicates that a company has cash to expand, develop new products, buy back stock, pay dividends, or reduce its debt. High or rising free cash flow is often a sign of a healthy company that is thriving in its current environment. Furthermore, since FCF has a direct impact on the worth of a company, investors often hunt for companies that have high or improving free cash flow but undervalued share prices -- the disparity often means the share price will soon increase. Free cash flow measures a company's ability to generate cash, which is a fundamental basis for stock pricing. This is why some people value free cash flow more than just about any other financial measure out there, including earnings per share.

Free cash flow can be used for various reasons, including distributing it to stockholders and debt holders.The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm's future earnings and dividends, and the riskiness of those cash flows.

Acquiring Operating Assets is not a use of free cash flow.