Free cash flow (FCF) represents the cash generated by operations that remains after a firm pays for the long-term assets it needs and distributes any dividends.

Formula used in the BUS105 text:

FCF = Net Cash Provided by Operating Activities – Capital Expenditures – Cash Dividends.

From the statement of cash flows:

• Net cash from operating activities ………………… $80,000

• Purchase of equipment (Cap-Ex) ………………… ($52,000)

• Dividends paid ………………………………………… ($25,000)

FCF = 80,000 – 52,000 – 25,000 = $3,000 → Option A.

B. $22,000 Fails to subtract dividends from operating cash flow; omits full cash requirements.

C. $52,000 Takes only the capital-expenditure figure; ignores operating cash and dividends.

D. $77,000 Subtracts neither capital expenditures nor dividends from operating cash flow.

1. Financial Accounting, OpenStax, Ch. 12 “Statement of Cash Flows,” sect. 12.5 Free Cash Flow, pp. 616-617: formula CFO – Cap-Ex – Dividends. (https://openstax.org/books/financial-accounting/pages/12-5)

2. Principles of Finance, University of Minnesota Libraries Publishing, Ch. 9 “Cash Flow Estimation,” p. 288: definition and calculation of free cash flow.

3. MIT OpenCourseWare 15.516, Lecture 5 slides, “Cash Flow Basics,” slide 14: FCF = Cash from Ops – CapEx – Dividends.