Question

b. Do negative values of free cash flow in way alter or invalidate the notion that a company's fair market value equals the present value of its free cash flows discounted at the company’s weighted average cost of capital? Suppose a company's free cash flows were expected to be negative in all future periods. Can you conceive of any reasons for buying the company's stock?

Answer 1

Free cash flow (FCF) is a cash flow available for distribution among all the security holders of a company. When free cash flow is negative; it could be a sign that a company is using up more cash to finance investments. If these investments earn a high return, the strategy has the potential to pay off in the long run.

c) Even though a company’s free cash flow were expected to be negative in all future periods, the company’s stock can be purchased for other objective rather than profit. These are; to prevent being at the mercy of foreign supplier of an integral component of production; to gain control or prevent hostile take over; for social value and patriotism, and partnership.