Question

i mean the definition for free cash flow is CFO - capex - dividend payment... why need to deduct dividend payment??

Answer 1

You payed your stockholders a dividend, why won't you subtract it?

Answer 2

Free Cash flow is "Earning Before Interest Payment+Depreciation and amortization-Capex-Change in working Capital". So according to my understanding Dividends are not deducted to calculate FCF. It is the cash flow that is left after satisfying cash needed for company operations and asset base maintenance or expansion. Now the cash left after all this is FREE to be given to shareholders (Dividends) or can be retained in the company (Retained Earnings).

Answer 3

You subtract dividend payments when calculating the value of equity not FCFF.

Answer 4

Please refer to Rating Agencies Report such as Moody's or S&P. They definition of FCF is to deduct dividend payment as well. I just want to find a reason why they did that. I know the standard formula is not deduct it.

Answer 5

"Capital expenditures and dividends are subtracted because they are real cash payments a company makes.

Some definitions of free cash flow do not deduct dividends from operating cash, based on the argument that companies are not required to pay dividends. However, once a company starts paying a dividend, the market expects it to keep paying a dividend and will typically react negatively if a company cuts or stops paying its dividend. Capital expenditures are also an important part of a business’ growth prospects. A company must, at a minimum, spend enough to maintain its level of business and upkeep on property and equipment. A company that fails to do this does not have a promising future."