Organizations that have high free cash flow, creditors are willing to invest in these companies since these companies have powerful tools for debt repayment and they clearly have greater financial flexibility. On the other hand, cash enables managers to develop growth opportunities and development programs that will lead to an increase in company 's value. The free cash flow theory was first introduced by Jensen (1986), he stated that “Free cash flow as cash flow left after the firm has invested in all available positive NPV projects”.
Free cash flows are a criterion for measuring the performance of firm which shows the amount of cash possessed by the firm after spending the amount of costs which are required for keeping or expanding the properties and other expenses. Free cash flows are important since they allow the firm to chase opportunities which increase stockholder’s assets. Without cash, expansion of new products, conducting business educations, paying cash profits to stockholders and decreasing debts are not possible Gholamzade Ledari, (2009).
Free cash flow
The firm takes the cash that’s left over and makes short-term net investment in working capital (e.g. inventory and receivables) and long term investment in property, plant, and equipment. The cash that remains is available to pay out to the firms investors: bondholders and common stockholders (let’s assume for the moments that the firm has not issued preferred stock). That pile of remaining cash is called free cash flow to the firm. Jensen (2000), defines free cash flow as cash flow in excess of what is required to fund positive NPV investments. Free cash flow is a sign of agency problems because excess cash may not be returned to shareholders. When fir...
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...ance trade may utilize it out purchasing overrated firms as opposed to paying out profits to the shareholders. This is conceivable notwithstanding when the organizations have a low budgetary limit in the wake of making acquisitions since they put resources into non productive speculation ventures (Carolyn, Carroll and Griffith, 2001). Firms can choose to hold free money streams for theoretical reason as they sit tight for a productive venture that can guarantee better returns in future. The firm can likewise choose to put resources into danger ventures that have higher returns; these speculations may later yield better returns which could be beneficial to the firm. Then again if6 inadequately contributed free money streams can contrarily affect on the benefits of the firm if the firm participates in danger speculations and wind up losing (Griffith and Carroll, 2001).
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