free cash flow - Free Cash Flow In the statement of cash...

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Free Cash Flow In the statement of cash flows, cash provided by operating activities is intended to indicate the cash-generating capability of the company. Analysts have noted, however, that cash provided by operating activities fails to take into account that a company must invest in new fixed assets just to maintain its current level of operations. Companies also must at least maintain dividends at current levels to satisfy investors. As we discussed in Chapter 2 , the measurement of free cash flow provides additional insight regarding a company's cash-generating ability. Free cash flow describes the cash remaining from operations after adjustment for capital expenditures and dividends. Consider the following example: Suppose that MPC produced and sold 10,000 personal computers this year. It reported $100,000 cash provided by operating activities. In order to maintain production at 10,000 computers, MPC invested $15,000 in equipment. It chose to pay $5,000 in dividends. Its free cash flow was $80,000 ($100,000 - $15,000 - $5,000). The company
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free cash flow - Free Cash Flow In the statement of cash...

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