Chapter 3 — Financial Statements (Step 1 of DCF)

Balance sheet, income statement, cash flow statement; Free Cash Flow (FCF).

FIN435 • Spring 2026 Theme

Links

Chapter 3 PPT Using a Balance Sheet to Analyze a Company (VIDEO) What is an Income Statement? (VIDEO) How Do You Read a Cash Flow Statement? (VIDEO)

Templates

Balance Sheet Template Income Statement Template Cash Flow Template

EDGAR

SEC EDGAR Company Search

FCF Tools

FCF Calculator (jufinance.com/fcf) What is Free Cash Flow (VIDEO)

Disclaimer: Materials are provided for educational use on jufinance.com.

What is Free Cash Flow (FCF)?

FCF is the cash available from operations for distribution to all investors (stockholders and debtholders) after necessary investments to support operations.
A company’s value depends on the amount of FCF it can generate.

Five uses of FCF

Pay interest on debt
Pay back principal on debt
Pay dividends
Buy back stock
Buy nonoperating assets (e.g., marketable securities, investments in other companies)

Operating working capital (NOWC) notes

Operating current assets (Op CA): - CA needed to support operations - Include: cash, inventory, receivables - Exclude: short-term investments (not part of operations) Operating current liabilities (Op CL): - CL resulting from normal operations - Include: accounts payable and accruals - Exclude: notes payable (financing, not operations)

Capex note

Capital expenditure (Capex): - Capex = increase in NFA + depreciation OR - Capex = increase in GFA

In-class exercise

Given: EBIT (operating income) = $3 million Depreciation = $1 million Expenditures on fixed assets (Capex) = $1 million Net operating working capital (NOWC) = $0.6 million Tax rate (T) = 40% Formula: FCF = EBIT(1 − T) + Deprec. − (Capex + NOWC) Answer: Capex + NOWC = 1 + 0.6 = 1.6 FCF = 3*(1−0.40) + 1 − 1.6 = 1.2 (million)

Case study (Chapter 3)

Topics: - FCF - MVA (Market Value Added) - EVA (Economic Value Added) - Balance Sheet - Income Statement In-class video: 4/3/2023 Excel file: (due with the final exam)

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