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Why is it important to use the Free Cash Flow in the Discounted Cash flow method instead of the normal Cash Flow?

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Question added by Yazan Ahmad , programmer , wysada
Date Posted: 2014/04/23
ebrahem yousef
by ebrahem yousef , senior Accountant , business Management Company (BMC)

Free Cash Flow is defined as Operating Cash Flow less Capital Expenditures. You use FCF in a DCF because if you just use OCF, you may not be accurately accounting for replacement of critical assets required to attain the economics expected in your growth modeling. Many companies underinvest in capital expenditures as they near a sale to show improving margins, so thinking explicitly about what the right level of investment required is and building that into the cash flow model is important.

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