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Financial terms in "Business and Management"

1. deferred billing

2. backgrounder

3. cross-selling

4. Glitterati

5. shelf life

6. Sealed Bid

7. Revolving Credit

8. Pan-European

9. Psychographic Segmentation

10. Enterprise Resource Planning

11. unconditional probability

12. firewall

13. Pink Slip

14. Matrix Management

15. Compound Interest

16. Vendor

17. class action

18. Luddite

19. Sale Or Return

20. Headhunt

21. Cash on Delivery

22. 3.14159

23. Markup

24. sold

25. Lifeboat

26. Scarcity Value

27. Tender Offer

28. Stipend

29. Wholesale Bank

30. Contingent Liability

31. result

32. Abram's Law

33. Below The Line

34. Knocking Copy

35. gratuity

36. Shark Watcher

37. Net Yield

38. Call Account

39. depository trust and clearing corporation

40. Hashtag

41. taxable spinoff

42. Double-dip recession

43. Capital Gains Tax

44. business process outsourcing

45. Serial Bonds

46. affiliated chains

47. Utopia/Utopian

48. heavy industry

49. Trade

50. Debt Exposure

51. Free Rider

52. Passing Trade

53. Nonprofit

54. Race Relations Act

55. org chart

56. Buzzword

57. Self-Actualization

58. Agio

59. Carload

60. privilege

61. media kit

62. Ex Gratia

63. Tag

64. listed company

65. fidelity bond

66. Sequester

67. fact book

68. product

69. Preference Share

70. sole agent

71. Trade War

72. reciprocity

73. Rust Belt

74. 24-Carat/Karat

75. Seedcorn

76. Convention

77. Book Depreciation

78. Appraisal

79. factor's lien

80. Bookkeeping

81. Permatemp

82. Wi-Fi

83. direct labor cost

84. Shadow

85. Zero-Based Budgeting

86. Share Incentive Plan

87. contingent voting power

88. independent company

89. Zero-Sum Game

90. private ownership

91. Double

92. Statistician

93. Figurehead

94. liquidation rights

95. Elasticity Of Demand

96. Ordinary Share

97. Political Correctness

98. Outgoings

99. public monopoly

100. Fill or kill

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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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