Free Cash Flow (FCF) and Net Income (NI) Differ in the Following

question 15

Multiple Choice

Free cash flow (FCF) and net income (NI) differ in the following ways:

• A)Net income accrues to shareholders, calculated after interest expense; free cash flow is calculated assuming all flows go to equity holders.
• B)Net income accrues to shareholders, calculated after interest expense; free cash flow is calculated assuming all flows go to equity holders and net income is calculated after various noncash expenses, including depreciation; FCF adds back depreciation.
• C)Net income accrues to shareholders, calculated after interest expense; free cash flow is calculated assuming all flows go to equity holders; net income is calculated after various noncash expenses, including depreciation; FCF adds back depreciation; and capital expenditures and investments in working capital do not appear in net income calculations; they do reduce free cash flows.
• D)Net income accrues to shareholders, calculated after interest expense; free cash flow is calculated assuming all flows go to equity holders; net income is calculated after various noncash expenses, including depreciation; FCF adds back depreciation; capital expenditures and investments in working capital do not appear in net income calculations; they do reduce free cash flows; and net income is never negative; free cash flows can be negative for rapidly growing firms, even if the firm is profitable, because investments can exceed cash flows from operations.

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Definitions:

Coupled With An Interest

A right or benefit that cannot be taken away because it is legally attached to another property or contractual right.

Agency Agreement

A legal contract creating a fiduciary relationship wherein the first party ("the principal") agrees that the actions of a second party ("the agent") binds the principal to later agreements made by the agent as if the principal had himself personally made the later agreements.

Writing

A method of recording language through the inscription or recording of signs and symbols.

Fiduciary Duty

A legal obligation of one party to act in the best interest of another. The party in a fiduciary relationship is usually referred to as the fiduciary, while the other is the principal or beneficiary.