A. Accouting issues limit the usefulness of reported earnings, while free cash flow is adjusted for these issues.
B. Determining free cash flow is easier than dividends.
C. A company must generate free cash flow to grow in the long run.
Answer: B
An analyst must review the cash flows from a company's operating, investing, and financing activities to generate a useful free cash flow, while dividends are simply set by the board of directors. Analysts use free cash flow whenever an investor takes a control perspective, such as in the event of an acquisition. The P/E model is considered weak because accounting issues can impact earnings. Companies that do not generate free cash flow in the long run are in financial trouble.
| Free cash flow | Dividend | |
| Accounting issues? | Less likely | - |
| Control perspective? | Yes (e.g. acquisition) | No |
| Easier to determine? | No | Yes (*) |
0 comments:
Post a Comment