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Financial terms in "Banking"

1. MIGA

2. ineligible bill

3. IB

4. charitable giving

5. deferred availability

6. preannouncement

7. tax-filing program

8. government-sponsored

9. adjustment credit

10. Federal Reserve Board

11. safe investment

12. conversion issue

13. predator

14. agent's commission

15. shopping basket

16. sharp

17. Netting

18. employer's contribution

19. loss given default

20. Compliance Officer

21. inter-city

22. press recommendation

23. PRIME

24. economic slowdown

25. entertainment allowance

26. Piecework

27. funny money

28. insider trader

29. flexible mortgage

30. compounding method

31. forecast dividend

32. pocket

33. compound amount of one

34. interchange rate

35. put down

36. calculation

37. positive authorization

38. bank book

39. keep

40. bargains done

41. itemised statement

42. viewdata

43. working underwriter

44. second

45. emergency credit

46. bills payable

47. token charge

48. customs official

49. dealer bank

50. first-class mail

51. bring forward

52. collect call

53. pay review

54. binding

55. legal section

56. projected

57. annual gross income

58. cash float

59. preliminary announcement

60. multilateral netting system (MNS)

61. co-creditor

62. secondment

63. half-commission man

64. Federal Reserve Bank of San Francisco

65. house telephone

66. additional borrowing

67. creditor nation

68. accounts department

69. backup copy

70. kind

71. balance

72. public holiday

73. appraisee

74. depository

75. EFT

76. forwarding agent

77. Barclays Index

78. police record

79. annualised percentage rate

80. share option scheme

81. money market account extra (MMAX)

82. steady

83. dishonoured cheque

84. appro

85. common ownership

86. overestimate

87. disenfranchise

88. APS

89. foreign exchange desk

90. red

91. performance share

92. rulebook

93. industrial court

94. zero bound

95. fraud squad

96. joint-stock bank

97. angel network

98. Lombard rate

99. arbitrage fund

100. internal

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Featured term of the day

Definition / Meaning of

Free Cash Flows

Categories: Finance,

Cash not required for operations or for reinvestment. Often defined as earnings before interest (often obtained from the operating income line on the income statement) less capital expenditures less the change in working capital. In terms of a formula: free cash flows = Sales (Revenues from operations) - COGS (cost of goods sold-labor, material, book depreciation) - SG&A (Selling, general administrative costs) EBIT (earnings before interest and taxes or operating earnings) - Taxes (cash taxes) EBIAT (Earnings before interest after taxes) DEP (book depreciation) - CAPX (capital expenditures) - ChgWC (Change in working capital) C (free cash flows) There is an issue as to whether you want to define the FCFs to the firm as a whole (the cash flow to all of its security holders), or the FCFs only to the firm's equity holders. For firm valuation, you want the former; for stock valuation you want the latter. To value the firm, calculate the stream of FCFs to the firm and discount this stream by the firm's WACC (weighted average cost of capital). This will give you the value of a levered firm, including the tax benefits of debt financing. Alternatively, you can discount the firm's FCFs by its unlevered cost of capital and add separately the present value of the tax benefits. To value the firm's equity, you can either take the above number and subtract the market value of all outstanding debt (liabilities) or you can calculate the FCFs to the firm's equity holders and discount this stream by the firm's levered equity cost of capital. Notice that changes in working capital have the same effect on free cash flows as do changes in physical capital, i.e., capital expenditures. For example, suppose you had to spend $XX to increase the capacity of your plant. This expenditure would be a reduction in free cash flow in the year it was made. Likewise, if you had to increase the level of your cash balance, inventory or receivables by $XX to accommodate greater sales, then this too would result in a like reduction in free cash flows in the year the level of working capital was increased. [Definition and discussion courtesy of Professor Michael Bradley.]

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