Chartered Financial Analyst (CFA) Level 1 Practice Exam

What formula is used to calculate cash flow per share?

1. (CFO - preferred dividends) / weighted average number of common shares

2. EBITDA / average outstanding common shares

3. Dividends Paid / Number of Shares Outstanding

4. FFO + interest paid - operating lease adjustments

The correct answer is: (CFO - preferred dividends) / weighted average number of common shares

The formula for calculating cash flow per share is accurately represented as cash flow from operations (CFO) minus any preferred dividends, divided by the weighted average number of common shares outstanding. This approach provides a clear view of the cash flow available to common shareholders after meeting obligations to preferred shareholders, thereby enabling investors to assess the cash-generating capacity of a company on a per-share basis. Calculating cash flow per share in this manner is crucial because it highlights the cash available for dividends, reinvestment, or other purposes that benefit common shareholders. By focusing on CFO, it effectively isolates cash generated from core operating activities, reflecting the company's ability to produce cash flow from its regular business operations. The other options do not accurately reflect the concept of cash flow per share for the following reasons: - Using EBITDA does not account for capital expenditures or working capital changes, which are essential for understanding actual cash flow. - Dividends paid per share do not represent the cash flow generated by the company's operations; rather, they indicate distributions made to shareholders. - The fourth alternative, which involves funds from operations (FFO) and interest adjustments, is more relevant in real estate and does not directly pertain to the cash flow available to common shareholders. Thus,