68 Part 2 Fundamental Concepts in Financial Management

3-6 FREE CASH FLOW

Thus far, we have focused on! nancial statements as they are prepared by accoun-

tants. However, accounting statements are designed primarily for use by creditors

and tax collectors, not for managers and stock analysts. Therefore, corporate deci-

sion makers and security analysts often modify accounting data to meet their

needs. The most important modi! cation is the concept of free cash! ow (FCF),

de! ned as “the amount of cash that could be withdrawn without harming a! rm’s

ability to operate and to produce future cash " ows.” Here is the equation used to

calculate free cash " ow:

FCF! EBIT(1 # T) " Depreciation # (^)! (^) ( Capital^
expenditures
" Incr^ ease in net
working capital
(^) ) (^) "
! $283.8 (1 # 0.4) " $100 # (^)! (^) ( $230 " Change incurr^ ent assets # Change in^
payables and accruals
(^) ) (^) "
! $170.3 " $100 # ($230 " [($1,000 # $810) # ($200 # $160)])
! $170.3 " $100 # $230 # $150
! #$109.7 million

3-6 Free Cash Flow xiv

The amount of cash that

could be withdrawn from

a firm without harming its

ability to operate and to

produce future cash flows.

Free Cash Flow (FCF)

The amount of cash that

could be withdrawn from

a firm without harming its

ability to operate and to

produce future cash flows.

A wide range of valuable! nancial information is available on

the Internet. With just a couple of clicks, an investor can! nd

the key! nancial statements for most publicly traded

companies.

Suppose you are thinking of buying some Disney stock,

and you want to analyze its recent performance. Here’s a par-

tial (but by no means complete) list of sites you can access to

get started:

• One source is Yahoo!’s! nance web site, http://! nance.
  yahoo.com. Here you will! nd updated market information
  along with links to a variety of interesting research sites.
  Enter a stock’s ticker symbol, click “Go,” and you will see the
  stock’s current price along with recent news about the
  company. Click “Key Statistics” to! nd a report on the com-
  pany’s key! nancial ratios. Links to the company’s! nancials
  (income statement, balance sheet, and statement of cash

  ows) can also be found. The Yahoo! site also has a list of

  
  

  insider transactions that will tell you whether a company’s
  CEO and other key insiders are buying or selling the com-
  pany’s stock. In addition, the site has a message board
  where investors share opinions about the company and a
  link is provided to the company’s! lings with the Securities
  and Exchange Commission (SEC). Note also that, in most
  cases, a more complete listing of SEC! lings can be found
  at http://www.sec.gov.

  
  


• Two other web sites with similar information are Google
  Finance (http://! nance.google.com) and MSN Money
  (http://moneycentral.msn.com). After entering a stock’s

ticker symbol, you will see the current stock price and a

list of recent news stories. At either of these sites, you will

! nd links to a company’s! nancial statements and key ra-

tios, as well as other information including analyst rat-

ings, historical charts, earnings estimates, and a summary

of insider transactions. Google Finance, MSN Money, and

Yahoo! Finance allow you to export the! nancial state-

ments and historical prices to an Excel spreadsheet.

• Other sources for up-to-date market information are
  http://money.cnn.com and http://www.marketwatch.com. On
  these sites, you also can obtain stock quotes,! nancial
  statements, links to Wall Street research and SEC! lings,
  company pro! les, and charts of a! rm’s stock price over
  time.


• After accumulating all of this information, you may want
  to look at a site that provides opinions regarding the
  direction of the overall market and a particular stock. Two
  popular sites are The Motley Fool’s web site, http://www.fool.
  com, and the site for TheStreet.com, http://www.thestreet.com.


• A popular source is the online web site of The Wall Street
  Journal, http://online.wsj.com. It is a great resource, but
  you have to subscribe to access the full range of
  materials.
  Keep in mind that this list is just a small subset of the
  information available online. Also, sites come and go and
  change their content over time. New and interesting sites are
  constantly being added to the Internet.

FINANCIAL ANALYSIS ON THE INTERNET