Question

Grossman lumber reported $102,000 net cash provided by its operating activities. if the company invests $4,000 in capital expenditures and distributes $8,000 in dividends, its free cash flow will be

Answer 1

FCF is a measure of how much cash a business generates from operations, net of capital expenditures, which it can use for various purposes, such as reducing debt or paying out dividends. When calculating FCF, we take Cash provided by operating activities and subtract any capital expenditures. Grossman Lumber generated $102,000 in cash from operations, and invested 4,000 in capital expenditures, so its FCF is 102,000-4,000= $98,000. We are not concerned with dividends because dividends are not a capital expenditure.