CFA Practice Question

CFA Practice Question

A firm had an operating cash flow of 4,500, financing cash flow of $1,200, and an investing cash flow of $-900. The firm has announced common stock dividends of $45 and preferred stock dividends of $23. If the outlays for maintenance of current capacity are $310, the firm's free cash flow equals ______.
A. $4,145
B. $4,445
C. $4,122
Explanation: FCF = Cash from operations - outlays for maintenance of current capacity - dividends declared. In this case, FCF = 4,500 - 310 - 45 - 23 = 4,122.

User Contributed Comments 11

User Comment
Rguerra Remember that when "outlays for maintenance of current capacity" is not given, the best approximation for FCF is FCF = CFO - CFI. This assumes that the company is only investing in whatever is necessary to keep production running. Note also that FCF can be given by FCF = CFO - net capital expenditures (which is total capex - after tax proceeds from the sales of assets).
octavianus Dividends are included here, but not at other times...

Only CFO-Net Capex
pjdeschenes How do we know if dividends are included in FCF? I've always reade FCF = CFO - Net Capex. Dividends are cash to the firms owners, so are included in FCF.
sony dividends are included in CFO (declared). They need to be excluded to arrive the FCF.
steved333 Remember that FCF refers to the CFs that are actually usable. When you declare dividends, that cash has been earmarked and cannot be used for anything else but dividends. Since that cash is spoken for and not free, it cannot be included in Free Cash Flow.
Hervz Does it not depend on whether it's FCF to the firm and to equity? I think from the question "firm's free cash flow" it means FCFF.

BTW, FCFE is obtained by subtracting debt payments and dividends senior to common equity from FCF.
santibanez Hervz, dividends are added back, not substracted from FCF as dividends are to go to equity (FCFE)
Lambo83 incomplete question omitting key information. FCFF or FCFE? Why are dividends deducted? FCFE shouldn't deduct dividends.
Lambo83 Think I've got it - FCFE = CFO - FCI + New Net Borrowing. And dividends will be included in New Net Borrowing which is essentially financing cash outflows netted against financing cash inflows. Anyone agree?
houstcarr this isn't right. should just be CFO - capex. declaring dividends does not result in any cash transaction, only paying dividends does. why would you take an accrual into account on this cash flow metric but not on any others??
myron @houstcarr: read steved333 and others' comments. If dividend is declared (although not paid) it is effectively not usable anymore and is NOT a cash flow for the firm.
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