Why is free cash flow (FCF) important and how does it help investors|Legit essays
Posted: January 26th, 2023
Answer the following questions:
- Why is free cash flow (FCF) important and how does it help investors? Please discuss. Also, explain how to use the free cash flow valuation model to find the price per share of common equity.
- Suppose a firm estimates its overall cost of capital for the coming year to be 10%. What might be reasonable costs of capital for average-risk, high-risk, and low-risk projects?
350 word minimum. APA format
SOLUTION
Free cash flow (FCF) is important because it measures a company’s ability to generate cash that is available for distribution to its shareholders. It is calculated as cash from operations minus capital expenditures. FCF is important to investors because it indicates a company’s financial health and its ability to pay dividends or repurchase shares.
Additionally, a company with a consistently positive FCF is considered more stable and less risky. The company can also use the FCF for reinvestment in the business, debt reduction, or acquisitions which can lead to long-term growth. A company with a high FCF may also be more attractive to potential buyers or investors.
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