The Correct Definition for the Cash Flows to Value a Firm (Free Cash Flow and Cash Flow to Equity)

Ignacio Velez-Pareja ()

No 3577, Proyecciones Financieras y Valoración from Master Consultores

Abstract: cash flow and time value of money. In this note we specify very clearly what has to be included in those cash flows and the reasons why they should be included. The main issue is related to the inclusion or exclusion of some items in the working capital and the current practice to consider that funds that appear in the Balance Sheet (cash and market securities and the like) belong to the free cash flow FCF and the cash flow to equity CFE. In the same line of reasoning, the idea is that cash flows have to be consistent with financial statements. With a hypothetical example we show the implicit financial facts reflected in the financial statements behind the practice of including as cash flow items that appear in the Balance Sheet.

Keywords: Cash flows; free cash flow; cash flow to equity; valuation (search for similar items in EconPapers)
JEL-codes: G12 G31 J33 M21 M40 M41 (search for similar items in EconPapers)
Pages: 13
Date: 2004-08-21
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:col:000463:003577

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