Chartered Financial Analyst (CFA) Level 1 Practice Exam

Which measure provides insight into the cash available to equity holders after all expenses and reinvestments?

1. Operating cash flow

2. Free cash flow to equity

3. Net present value

4. Return on equity

The correct answer is: Free cash flow to equity

The measure that provides insight into the cash available to equity holders after all expenses and reinvestments is free cash flow to equity. This metric calculates the amount of cash generated by a company's operations that is available to be distributed to equity shareholders after accounting for necessary capital expenditures and operating expenses. Free cash flow to equity is crucial for equity holders as it reflects the financial health of a company in terms of its ability to return cash to shareholders, whether through dividends or stock buybacks. By focusing on the cash available after reinvesting in the business, this metric provides a clear picture of the company's capacity to reward its equity investors. In contrast, operating cash flow represents cash generated from operations without considering reinvestments, making it less relevant for gauging cash available to equity holders specifically. Net present value is a measure used to assess the profitability of an investment project by comparing the present value of cash inflows to outflows but does not directly relate to cash available for equity holders. Return on equity measures a company’s profitability relative to shareholders’ equity and does not directly indicate the cash flow available to equity investors.