ࡱ> %` HXbjbj"x"x e@@-I%#.&$z3z3z383<3G44"444<<<FFFFFFF$HhKvF<;<^<<<FJJ44mdG???<J44F?<F??:jBg< C44 PUz3-=|B DzG0GB.zK=zK C CTzK]D<<?<<<<<FFQ?d<<<G<<<<dv%v%JJJJJJ Free cash flow Free cash flow refers to cash that is available for distribution to creditors and stockholders because it is not needed for working capital or fixed asset investments. Perhaps the most important item that can be extracted from financial statements is the actual cash flow of the firmin practice, there is some variation in exactly how free cash flow is calculated. Note: Net Income `" Free Cash Flow Cash flows received from the firm s assets (i.e. operating activities) = cash flow to creditors + cash flows to equity investors Total Cash Flow of the Firm (Corporate Finance, 8th ed. by Ross, Westerfield, & Jaffe) Total cash flow of the firm = Operating Cash Flow - adjustments for capital spending and additions to net working capital. Formula: Operating Cash Flow - Capital Spending - " in Net Working Capital = Total Cash Flow of the FirmStaples (2007): 1,360,465 - 555,026 - (-21,658) = 827,097 Step 1: Cash Flows from Operations Operating cash flow measures the cash generated from operations (i.e. business activities like the sale of goods and services). It reflects tax payments, but does not count capital spending or working capital requirements. Formula: EBIT + Depreciation - Tax = Operating Cash FlowStaples (2007): 1,519,138 + 339,299 - 497,972 = 1,360,465 Note: Operating Cash Flow = NOPAT + depreciation where, Net Operating Profit After Tax (NOPAT) = EBIT (1 tax rate) Step 2: Calculate Capital Spending Capital spending measures changes in net operating long term assets (i.e. plant, property, and equipment), the figure represents the acquisition of fixed assets minus the sale of fixed assets. Formula: Ending PPE - Beginning PPE + Depreciation = Capital SpendingStaples (2007): 1,974,121 - 1,758,394 + 339,299 = 555,026 Step 3: Calculate the Change in Net Working Capital Formula: Ending " (Current Assets - Current Liabilities) - Beginning " (Current Assets - Current Liabilities) = " in Net Working CapitalStaples (2007): (4,431,363  2,788,383) - (4,144,544  2,479,906) = -21,658 Total cash flow of the firm = Operating Cash Flow - adjustments for capital spending and additions to net working capital. Formula: Operating Cash Flow - Capital Spending - " in Net Working Capital = Total Cash Flow of the FirmStaples (2007): 1,360,465 - 555,026 - (-21,658) = 827,097 The authors note: A firms total cash flow sometimes goes by a different name, free cash flow. Comments on Change in Working Capital While the formula discussed above offers a general guideline for calculating the cash flow to the firm. In practice several adjustments are typically made to the basic equation. Remember FCF calculates the money that is available for distribution to all of the companys investors, including creditors and stockholders. Lets look at the change in working capital a little more closely Short-term investments are not WC. ST investments are typically a result of investment decisions made by the treasurer. ST investments sometimes represent capital that is parked for an acquisition or major capital investment. Note: When you are uncertain about an item, ask yourself whether it is a natural consequence of operations or a discretionary choice (i.e. a method of financing or investment in a financial asset). If it is a discretionary choice, it is NOT an operating asset or liability. Example: Staples 2007 Balance Sheet  SHAPE \* MERGEFORMAT  A more accurate calculation for the change in Net Working Capital for Staples is shown below. 20072006Cash1,017,671977,822A/R861,905725,929Inv.1,919,7141,706,372A/P2,587,2061,754,786Accruals1,212,0841,655,337 Updated: Calculate the Change in Net Working Capital Formula: Ending " (Cash + A/R + Inv. - A/P +Accruals) - Beginning " (Cash + A/R + Inv. - A/P +Accruals) = " in Net Working CapitalStaples (2007): 1,212,084 - 1,655,337 = -443,253 Updated: Free Cash Flow Formula: Operating Cash Flo/ > > B x | ( X & ( #*+,ྺ଺zzun hY1h| h|5hY1h|5jh|0JUh).hA9 h|5h|h#h#H*h#h#>*h#h#5>*hY1h#hA9 h#6jhA9 0JUhvhxshxshxs5hA9 hxshA9 ;hxshA9 5;hxshxs5;+ < > @ B & L $$Ifa$gd#* $Ifgd#*gd| ^`gdY1$a$gdv$a$gdv$a$gdxsMCQhQFX +,-PQ67@trrrje\ $IfgdY1gdY1$a$gdvkd$$IfTl0   t0644 layt#*T $Ifgd#* ,-3Qd237>p 3456<YZj%dstⱪ h'5hY1h'5hxshxs5hxsh'h'5>* h|5>*h' hT8dhT8dhT8dhT8d6 hY1hT8d hY15hY1hY15jhY10JUhT8dhEhY15hY1hY1hY15>*h#4@ETZphcgdY1kdn$$IfTl0   t0644 laytT8dT $IfgdY1 $$Ifa$gdY1 456YZ'2BQdt $$Ifa$gd' $$Ifa$gd#* $Ifgd#*$a$gdv`gdT8dgdT8dgdY1"$PV|@B s綮 hY1h 9 h 95hY1h 95jh 90JUh 9h).hA9 h 95hT8d hY1hxs hxs5hY1hxs5hY1 hT8dh'jhv0JUhvhxshxshxs5>*h' hY1h'2$R}xxvmaaammm $$Ifa$gd#* $Ifgd#*gdY1kd$$IfTl0# i  t0644 layt'T H|trjeY $$Ifa$gd#*gd 9$a$gdkdE$$IfTl0# i  t0644 laytvT $Ifgd#* 6l !"hfkd$$IfTl0   t0644 layt#*T $Ifgd#* $$Ifa$gd#* sfgh !%'346=Z[\]tuvwxy+,DQR[\efghо۶׶כz hChC hv5EhChhZc hbhChChC5hCj!h$Ujh$6UmHnHujh$Ujh$0JUh$h$6 h$h$h$hh$h56jh 90JUh 9h 9h 95/"gh<_ !56[gd$$ & F pa$gd$$ & F ha$gd$$a$gd$$a$gd[\yzymm $$Ifa$gdC $Ifgd0ikd$$IflF ,X t6    44 laytC $$Ifa$gdCgdC   $$Ifa$gdC $Ifgd0ikd_$$IflF ,X t6    44 laytC!+ $$Ifa$gdC $Ifgd0ikd $$IflF ,X t6    44 laytC+,0:D $$Ifa$gdC $Ifgd0ikd$$IflF ,X t6    44 laytCDENOP $$Ifa$gdC $IfgdCikdM$$IflF ,X t6    44 laythZcPQR\f $$Ifa$gdC $Ifgd0ikd$$IflF ,X t6    44 laythZcfgh*L{{oo $$Ifa$gdC $$Ifa$gd0 $Ifgd0gdCikd$$IflF ,X t6    44 laythZc ho 6LLLL8M:MMMMMMMMMMMMNNNNKNLNNN8OĽݶݮݣݣݔ~vhA9 h$H*hA9 h$>*h$jh$0JU hhZchhZcj3hhZcUjhhZchhZcUhhZchhZc>* hY1hhZc hhZc5UhY1hhZc5hhZchhZc5>* hY1hChhZc hC5hY1hC5 hT8dhChC hhZc5>*. 8^L*L`Ltrrfff $$Ifa$gd0kdW$$IfTl0   t0644 labythZcT $Ifgd0 w - Capital Spending - " in Net Working Capital = Total Cash Flow of the FirmStaples (2007): 1,360,465 - 555,026 - (-443,253) = 1,248,692 This is consistent with the formula in Financial Management, p. 101 (shown below)    Source: Corporate Finance, 8th edition by Ross, Westerfield & Jaffe; p. 29-32.  When firms are growing rapidly, spending on inventory and fixed assets may be higher than operating cash flow causing this figure to be negative.  This is the cash the firm is generating to pay operating costs (generally positive).  The change in working capital is usually positive in a growing firm. The book uses a simple example (that I follow here). It is important to note that changes in working capital should be more closely examined.  When firms are growing rapidly, spending on inventory and fixed assets may be higher than operating cash flow causing this figure to be negative.  Source: Corporate Finance, 8th edition by Ross, Westerfield & Jaffe; p. 32.  Source: Financial Management,12e by Brigham & Ehrhardt, Chapter 3, pp. 96-97     PAGE  PAGE 4 `LLLLLL:MMMMMMMtrrrrrrkd$$IfTl0   t0644 layt0T $Ifgd0 MMKNN8OPPPBQCQEQFQHQIQKQLQNQOQXQYQZQeQfQgQhQh]hgd &`#$gdgd 9gdY1gd|gdA9 8O9OPPPPPPPPPPPPQ-Q6QAQBQCQDQFQGQIQJQLQMQOQPQVQWQXQZQ[QaQbQcQdQeQgQRXXX X XXXXXXX"X$X(X*X.XļļļļIJ񲬲ğ!h$5B*OJQJ\^JphUhhZc0JmHnHu h$0Jjh$0JUjh0Uh0h$h$6]h$h$>* h$h$hA9 h$H*hA9 h$>*h$jh$0JU8" X X X " " X " hQXX X XXXXXXX"X$X(X*X.X0X2X4X6X8X:XX@XBXDXFXHX 7$8$H$gd$.X0X2XDXFXHX hhZchhZch:BhhZchCh$,1h/ =!"#$% @=+[C96,{{p]s?=T!9k_KiPLKakzVV1$f ޿|hZx..OgνuE9u\$ο*ο*&6D?;$\|3WA$jz,]}>opœ#ߎMUwT$r!rI>ڟlOjUP+]m'dPg2~?A^$ NTǵ :XZсuB-[_P2;Ho7l̑b/ie(ɧHkW-cA$9sݼ8L.\Q&A֫Geeuy1HI= GҸWM #xįe~8H=M{7+\mcST Gy\L?6y;*(Sy>\;cE }en#P7J,x{b)ǹC:Y^>WQrkRtl>n.ӕ3$DѹdLWrFM[* 27\ O"t㤘 YSI_Ҧ-2x:^vO]?>[b"mf6=}s2_fxj@s|>ϗ<ӉQSnOgG`G]q+B61kM?He=CuM4>QaoA~@}xR"wv>nu+ҁp׭+>+:짭07VϘ!uSob?cJic{ ׸|}ioezƞp\}5n.,j.ģeQsl&-+.r|Elw"w6[1o|(n83Q?|-ϳFza|`ξtV忳.X=#y=Ygݍb+{yRNsV;%y^,_1.89gbgڸ6̜8,#-oc&x@AzaƳM xĬe>ϒ&ΠZmVX&N-#yǕ'0Ol,Ypz7O@,`|kә[mSeY-|ݾ>˼`E՞JgMS= \cNrN8V/[iݾq}'_.?nxi E=qģe v6}6-׸!XW }h_6-c;6qj>[ʼniVX`&N-He=Unm)ϰ qkw+ϰ8g/?V,>öoԲnM*כͫI&wdQϫ@cE O{-RWקt`tK\b H}:[7Cf~!q7LOʸOQ|ԧsYgKzwʗnkqE] OGˢ'lģe qnmQy^0{+dQ+\aQM"OZ,2>n}iק j+M*خMc;ڬش[JFM6-ܳ٦׷ۋ٬sYb2xMZf^aDko̦\eja~Ӧ|1ddvhOծ3qu# =YC3S=ɬD?-(0VNGE0*ַ5T$֋-{}3P])2q-ZK(,L/\C?dU>} ,bY6"ND9|Q_ 'ӁtbS8gQAl)Wk<,re&]i~^ ަRpt;J6=d[xRk3mNcL"nuɺnA.ck} 7Lگ;QKηޠ/kH럡z 25G֑P<*/#牢׍gh[u:=n#z߰M~ AeJx[}t\b,IǺWi9|Q,q9Hmr9O9#YzňWv3O8l^/[?~\(]dȣBk)6]Njod:lÆ:5; 1.;z8 !?;GkؼTމ2@[+ rɶQg8KvQ?b=MZ}lʋrMbߪQߠ,P IǷ`/%m㘯6q=nd?>[NպSf&I=of\t@?kMd<ٵyu-m+~0_OS:Jzw ׵ݲWNYJhwi]1[qM? s2~#tO?äWOs ǣf,rF5>vi*e|#9#vI'om٠3vk\Xr 47Wo_zs0BdR p+U/1FZil%3J,5Fci-:k L;lkE wnÛΫ-nB7$pCx-b|v7rgCLuXڨג"F4S1*}-~Oi%7(< ٟQ5^rOsP:hkxզX_ǓߑQ"Z:IoZ~}t]@'G[ÍoF:N /[IKΟ%=gbؘU ζpjbWr{~b>ӨfDob~ B|P/3UR¼r{y_%ko^slŻm.5upq;z>O#|ͱ3DYV_ ջ/Rp*d~3\sן3z>`{[-Xґ'utgss˜y@(MkW]CjV=}-7ה ep5 cd@=c|61EsiN%B0 T <!1x՚]LW ku(V %ZI  Q0ҔXPTFL}A,mDڴ&jӤ4m sf,nݹ3wsrЄ~2@l*+@ jrUwx_s#n8U[fZ;,n`֭ԟu˅]@2o;q}ꢛH:,nS еW<[SAspp^qs$pK Gw`UswSZ6kҽ笍{_`$1y`/ҍ'mP^1E kN,6p:͛e}Ï.%{Q}Z~:l><^O.Z+o;(ۏxqgTm;Ƕhgo3R&d&Z&8b$o=\`&SxŘ./~ͯ.ŹȧE+t `t|/b'>‘`~9vv"zLJ}o]+];u]z}nlu:HwbyaJ$Jdޟm Xj 2;N·耿={~MH*R`6q =% :6VsB:Jk^$wu2]"N>NrBmIbNB|TƤe+G3`bb@QkCH : ދri q]GA8 !\EAةv^V#Ъ^V9&UȴŨ7\Jx+EU/.V8gN)|>Gta@vt(}ՌKz i1eڈPŅDZUjU2Kv7N`vWHv&=vz^6`ڤfڌST"Sc{<נ 1;: sAQp '𝛓36.;yq1mme$;!G&vˌR)67NWoghH:sXZm'%tU[`;<= Q1?O#>wvӽơr@h=?gc 'q(r@ >sZG'G96HUe(ji28*e"vv5'Yx2oU뢒-I7A@̊odHV:RQfKeK*X5Ylfg@8b(ƊYS+MG :z|"XXי&NJb3ĊYQtގMN!-H(V#FGI <yx& q7čYQ8j2#>H|Gfǐ Cp|Mf0J@kV$4˺/2jguw˻iZz%M>X6{+IiY(fg5;ߗ{p VLDrCk^.E+r}|)jI\NZoU)1C6b8fIx3#@v 'н-6ybulPa,P*iT!>NC6 +jn X*%o;oMށ\,eTzBCٴȕ؉ y3*c SlUwtf%reESπu2u2[eM:`2tbJĔQCh)T,b=/ei}Bk3~rDsxŚTX;@= Oddc%`!FY 3H`8+ x lߝϱ:sڹs6ÉTq`*$r>B ĔD#܆q DZE*R1*j*D !mHq+*5RdEJ{;s;"N;3;1{o.0O)ߨ.C#V ze= B\k\U;>+4aR1asx`>)!dnCP[/GT^BUu񒙲PfbLt/hkyfR&]o.R^o l4;֭[u~o鵲t2^ǒm6^~.@o<YDo@=TBIxW^NB^) < };C\\ htz6;Wگx' `==5F(n!,{q.JBp>v7:ya{-C` uz >uw.M9Lor.ʌ\ɹb aqMcҽ"n؀i_|0nY|͂QR7\}"EVO"wmx 4},XM/wTv=PM~#\xS'{\mURjا2){41=r'^ѡ.qAeE ';7;//˪e^x]2n #k >u76-sQ\\tsFk9gFM"mLn{q۹tM/߶FNi??;Xu>Km3͵͒ {<ޖCyp;xcQ {#"܌*y9.u3BӱĒ9>w3W{nA2nȄUʦ0jq5( ;[K9#W dt\$[Q̸ *#.bʬD;C# Ku{i[ceɞ²'yws OMl|Y]r#98҄a cQv ބFL[ކn'gb\8R$$n6ĵZm8>3K%6:as8)i|t+X/^ |+8:WUzA6~릑0~ީ j{{>wWaIDFvW?̸Mc]ȟ*}ĶF:ƒcvjQ$ׁۑ㟣IQgӂ̴V|6l}3{Ӈb}7v<_|g΍žaV$R2\/2cXڎ9rqCF^xx]S:`>Vɖť ?2uC7jJ Ob~/~ڭGtR[UTFm(~O 2Slx 1!DGʢBO?ʆqٯ%͍Eѕ*?Rm ŏZuІV4G޹΄8Sv]R(ڤ45_'~D\QHVUF;vI)~943.n<~D\Sj؛V]5땸lHGP\92Ⴋ}^p4gUO1q̍Y5Qsا.ȘS\\Ȃw0X\pA{>?BqY+n|s86_g5qo=*Ff5kۊc{ GxL >_}X|A1FWďy!-+z&ǐV y _/Ű<fC1T o|[>{4bY6D0U66k;vSqkT5S+.Jr1A}pQ\.}e=dby\Krwe_!C_I+a>TfʈC'߬)@Q%WO|kwNt"%i*/,U렱R>E6k+gfKclb1}Slat{'9QU.d{muYsH'+^t[Om^1k&Qƚˆgc .ϪOݎ4n{/\G9\8;shN%3r^n8pyY媽>>=-a,mP,QٞpLWf{vָa,3[Vv[E y'/O0&bv.χy;l$$If!vh5 5 #v #v :Vl t65 5 ayt#*Tg$$If!vh5 5 #v #v :Vl t65 5 ytT8dTl$$If!vh5i 5 #vi #v :Vl t65i 5 ayt'Tl$$If!vh5i 5 #vi #v :Vl t65i 5 aytvTl$$If!vh5 5 #v #v :Vl t65 5 ayt#*TDd mD  3 @@"?$$If!vh5X55#vX#v:Vl t065X5/ ytC$$If!vh5X55#vX#v:Vl t065X5/ ytC$$If!vh5X55#vX#v:Vl t065X5ytC$$If!vh5X55#vX#v:Vl t065X5ytC$$If!vh5X55#vX#v:Vl t065X5ythZc$$If!vh5X55#vX#v:Vl t065X5/ ythZc$$If!vh5X55#vX#v:Vl t065X5/ / ythZcl$$Ifb!vh5 5 #v #v :Vl t65 5 abythZcTl$$If!vh5 5 #v #v :Vl t65 5 ayt0TDd e6 loD  # A#" `" {֥vw%@={֥v@Ny. x\PTvqT-*$W%RHkh_@k.轝lJ|XQac+OƱьIM+3*j^O}e<}9.S9|sww~TP!Dp< #pqM0nPe6@#UCk_pP[ T$*4 & .UeQA<ƍ}_Pj(o%7Bh:٢fB؝sZ%̕bWt'coΚI}1bsQ:Y>K!ugqB?+ڊlYNFBuI8Jygt󡮁|UwX~I0VIqKWLn~c㧭|I=9|u咮r&Hj4]$V1g 4dwc1"'+NSJHIz!E3wXY=R9UcTDēo`M21muFcZrdQAzb /奜c)!9[CrH65a0$љ\wcӬs%W"5;4UGaO)NxtY5,D6w(1w$FM^6D0l\ voX|>IB A5I?1lf7>"?p"=ʇףXN--`5nU89F\yqa7kkwI(CX;z070\mPZ0ͷ5s>} v\v?F~Zc6A Ǵ21m&gwW.,1T- OBX&wŕ&3Gy4@]/lZs"/R4=٠4wy/nטI'Q5b7*X'.D)N^X?&.ޏ \#kQ֡4EE""LAvwtm oܶz.mڗk}S 0! q(m=΁qš G 2Rex,i)x_TnӰ:k8So[Pӽo[i9~G-F=]E \Ivrw/n6OaċWVшm{06=e)M&"ndE7_ld}_z ؟-jM#l|z&:[Ιwֽ\1[x ,G3麧r/q%/+Hv-0[T`b3doa &H~\3}mo|d[ Yr)u|;eaanvsqnoiLǁ[|RϹq:7.[yˮGuuڧ @ ]_ሞq> Pq:kl0w刕;  ;|v>PVJaPkޥK>ްC܃$$ww8vRaXGv ?} @29v5k}eMS?p1ACiNqAs 'Pͩ˜CAEM'.(pWE}[={E̖HP3uئv4viP|O+Tim{Of80qdłhی[9 J=kw 2˭H6VIo͡.>2`%>Hɲrf:0*q9qY|1Y{&e6gftLyCU\Dnǔ7JrrK+斺ZZǁ }km<R=tA/>|~!_ }g35|'vⳡ 1Ϲw:}SG?kz5կk̏;1,C۱ݏϗ r?z }C}l^o8۷Ivm=bQyS 6oap6HO;ˆyPmswm"ULVLR3Q^<F '-guO 8\zp0`.`42_am;]⡕3l\Sۥ{s.'YY{ü:*RvX{s;x ݃[?^_8|像Rmϑl4|qYJg#캓ax XFlt%^{/qq]/rҙTvm$3̅ Sq{Z q[~ϸ- 7L 7c!jx/X=7Ӏ9㦫irq1u.;FyM@qk=ŧQ&5؏'3U"V5Z8lV%{Pfl[~Zء>'Lk/=0kfCWQËq԰l-(goiQ/ S?p1g |C2&1?.p㉋':žMƣ /'Ũ|U^/sC"&~1͇Gi9QK5;v֡~]˺}r[mo-̋L[ # uL}>ySzI=+c$M+S}^/]>9OSs'7>#h~A/vJG+;FXe\^ȤW3W+Ir7%+םWz_g}6'w }rNl-'1fZ O';i3\v8T=o|鴣ft')KuJ4 v1}LztHx/1b.0bE@> A9 Footnote TextCJaJ@&@@ A9 Footnote ReferenceH*j@j Y1 Table Grid7:V04 @"4 Footer  !.)@1.  Page Numberr Q>HK  !"             !"%     ^)*/Jhx 'EFGNy !=>?tu~)CVqrs ; Y i s }      8 9 } ~ 9 ]^_dijoy"#,HYz!5Hc%(*+,-~kB&uvxy{|~00000000000000000000 00000 0 0000000000 00000 0 000000000000000 00000 0 00000000 000000 0 00000000 00000 0 0000000000000000 0 0 0 00000000000 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 000000000 000000 0 0000000 00000 0 0000000@0@0@0@0@0@0@000H@0X00@0X00@0X00@0X00@0)@0@0@0@0@0X00$00000000000000000X00X00X00X00X00 xX00 xX00xX00x0/0/JhxFGNy !=>tu~qr ; Y i s } ~ 9 "#,HYz!5Hc*-~kB&Z00":Z00!Z00 @0@0@0@0@0@0@0@0@0@0@0@0@0 Z00HSZ00Z00Z00@0@0@0@0@0 @0@0@0@0@0 @0 Z00 Z00 @0@0@0@0@0 @0@0 @0 @0@0@0@0@0@0@0@0@0@0@0@0@0 Z000Z000Z000Z000Z000Z0;0Z0000Z00 xZ00!xZ00~UVr Y _z-vvxxyy{|~-vvxxyy{|~a6X➵* hh^h`OJQJo(  88^8`OJQJo(  ^`OJQJo(l   ^ `OJQJo(    ^ `OJQJo(  xx^x`OJQJo(  HH^H`OJQJo(  ^`OJQJo(  ^`OJQJo( Xss@CJ$OJQJ^Jo(-Fz|uqrY ^_dijoy#@''$/''@{ 333P@P P P@PPP,@PPLP@PXUnknownGz Times New Roman5Symbol3& z Arial;Wingdings"1hWD&3Y4%%2QHX ?E2FREE CASH FLOW Wendy Jeffus Wendy Jeffus  Oh+'0 $ D P \hpxFREE CASH FLOWWendy Jeffus Normal.dotWendy Jeffus6Microsoft Office Word@@@՜.+,0 hp  Clark University%' FREE CASH FLOW Title  !"#$%&'()*+,-./0123456789:;<=>?@ABCEFGHIJKLMNOQRSTUVWXYZ[\]^_`abcdefghijklmnopqrstuwxyz{|}Root Entry F@ XData D1TablePKWordDocumenteSummaryInformation(vDocumentSummaryInformation8~CompObjq  FMicrosoft Office Word Document MSWordDocWord.Document.89q