- مبلغ: ۸۶,۰۰۰ تومان
- مبلغ: ۹۱,۰۰۰ تومان
Free Cash Flow (FCF) was adopted in the late 1980s as a financial tool to evaluate the firm and its individual projects. We question the procedure of calculating the FCF where a significant portion of Current Liabilities is offset against Current Assets, thereby creating the hybrid asset Net Working Capital (NWC). Borrowed from accounting methodology, that procedure distorts the FCF size, composition, volatility, and estimated value. Our empirical analysis shows that the nature and extent of those distortions can misinform the firm's stockholders, lenders and borrowers, and investors at large. We propose a revised FCF that would avoid those distortions.
4. Summary and conclusions
This paper challenges the common valuation procedure adopted in corporate finance in which the flow of Current Liabilities, or a significant portion thereof, is offset against the flow of Current Assets to create the hybrid flow of Net Working Capital. While consistent with the methodology of the accounting Statement of Cash Flow, this offset is inconsistent with the economic-based FCF, a financial tool designed for firm and project valuation. This paper demonstrates that the offset can significantly distort the FCF in terms of size, composition and volatility, leading to additional distortions in the firm or project size, debt and asset compositions, financial leverage, risk profile, and estimated value. The conceptual and empirical analyses indicate that management may prefer the offset-based FCF, which can be better controlled in terms of size and stability. The corrected, narrower definition of FCF would eliminate this flexibility. The proposed offset-free CFCF is a logical substitute, which would better serve investors and their loyal company management, lenders, and other stakeholders by leading to more accurate, unbiased value estimates of the firm and its planned projects.