Question

Everything else equal, which of the following prediction about a firm's Free Cash Flow is most...

Everything else equal, which of the following prediction about a firm's Free Cash Flow is most likely true?

Group of answer choices

A firm invests heavily in infrastructure will have higher free cash flow to firm this year

A firm borrows and invests heavily in infrastructure will have lower free cash flow to firm this year

A firm pays down debt will have lower free cash flow to firm this year

A firm borrows will have higher free cash flow to firm this year

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Homework Answers

Answer #1

Option (b) is correct

A firm borrows and invests heavily in infrastructure will have lower free cash flows to firm this year. Free cash flows are given by:

Free cash flows = Cash from operations - Capital expenditure

When firm borrows, then it pays interest. It will reduce its cash from operations. and when the firm invests in infrastructure, then its capital expenditure will increase. So, as per the above formula of free cash flows, when cash from operations decrease and capital expenditure increases, then free cash flows will be lower.

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