Compute the company’s free cash flow to equity using the residual income model
Transcribed Image Text:Caleulating Free Cash Flow. Below are data from the financial statements of Berkshire Audio.
Net income..
Common stock issued (net)
Cash from operations (net).
Cash from investing (net).
Change in debt (net)...
Dividends paid
Change in operating cash (net)
Change in common equity (net).
$2,500.00
500.00
3,125.00
(1,000.00)
(1,187.50)
1,000.00
437.50
2,000.00
Compute the company's free cash flow to equity using three different methods. (Each method should yield
the same answer.)
Definition Definition Net amount of cash that an entity receives and expends over the course of a given period. For a business to continue operating, positive cash flows are required, and they are also necessary to produce value for investors. Investors in particular prefer to see growing cash flows even after capital expenditures have been paid for (which is known as free cash flow).
Expert Solution
Step 1
Free cash flow:
This is the cash available with the company or the cash flows generated by the company after supporting the operations and maintenance of its capital assets. This is a profitability measurement that does not consider non-cash expenses and considers cash expended on capital assets and working capital changes.
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