Question

The Free Cash Flows Valuation Approach. Explain the theory behind the free cash flow valuation approach. Why are the free cash flows value relevant to common equity shareholders when they are not cash flows to those shareholders, but rather are cash flows into the firm?

Please keep your original post to under 100 words.

Answer 1

Free cash flow is measured through operational cash flows and it is generally done in order to value a company and value the the cash flows accruing to the company. This valuation approach will be discounting the cash flows at the present value which are available to the equity shareholders and this free cash flows are are important to equity shareholders as equity equity shareholders are often invested into the company and they want the capital appreciation in the company so if this free cash flows to the firm will be going up it will mean that the valuation of the company will be going up and it will mean that equity shareholders will be gaining eventually in the long run because this will either mean that they will gain through capital appreciation or dividend payments.