Chartered Financial Analyst (CFA) Level 1 Practice Exam

Disable ads (and more) with a membership for a one time $2.99 payment

Prepare for the CFA Level 1 Exam with comprehensive study guides. Access multiple choice questions and detailed explanations to enhance your readiness. Start your journey to become a Certified Financial Analyst today!

Each practice test/flash card set has 50 randomly selected questions from a bank of over 500. You'll get a new set of questions each time!

Practice this question and more.

What is the formula for calculating free cash flow?

CFO - capital expenditures
CFO(adjusted) - Capital expenditures
CFO + FFO
Gross interest - Interest income

The correct answer is: CFO - capital expenditures

The formula for calculating free cash flow is typically expressed as cash flow from operations (CFO) minus capital expenditures (CapEx). Free cash flow is a crucial measure because it indicates the cash a company generates after accounting for the cash outflows needed to support operations and maintain its capital assets. This metric is essential for investors as it provides insights into the amount of cash available for dividends, debt repayment, and other investments. This straightforward calculation allows analysts and investors to assess the company's financial flexibility and ability to grow through expansion or return capital to shareholders. By focusing specifically on the cash generated from operations, you can determine how much cash is available after necessary investments in capital expenditures have been made. The other formulas provided do not accurately capture the conventional understanding of free cash flow calculations. Understanding the importance of the core components—cash flow from operations and capital expenditures—is vital for interpreting a company's profitability and capital efficiency.