Free Cash Flow

Explanation

The definition of free cash flow varies widely, depending on how one defines required and discretionary uses.

Free cash flow is defined as the measure of cash available to the firm for discretionary uses after making all required cash outlays. It represents the cash flow generated by the company's operations that is available for various purposes, including debt reduction, reinvestment in the business, dividend payments, share repurchases, and other discretionary uses.

Let's analyze each answer choice to determine which one is incorrect:

A. Cash flow that includes discretionary uses such as debt reduction: This answer choice is correct. Free cash flow does include discretionary uses such as debt reduction. When a company generates excess cash flow, it can choose to allocate some of it towards reducing its debt obligations.

B. The measure of cash available to the firm for discretionary uses after making all required cash outlays: This answer choice is correct. Free cash flow is indeed the measure of cash available to the firm for discretionary uses after fulfilling all necessary cash outflows. It represents the cash that the company has available to allocate towards various purposes.

C. Better to have a large sum of: This answer choice is incorrect. Free cash flow is generally considered favorable when it is higher, as it provides the company with more flexibility and resources for discretionary uses. A larger free cash flow allows the company to invest in growth opportunities, reduce debt, distribute dividends, or undertake other value-enhancing activities. Therefore, having a large sum of free cash flow is generally preferable.

D. Defined as cash flow from operations minus all capital expenditures: This answer choice is correct. Free cash flow is calculated by subtracting all capital expenditures from the cash flow from operations. It represents the cash generated by the company's core operations that is available after accounting for the necessary investments in capital assets.

E. A cash flow with one definition because of its several discretionary uses: This answer choice is incorrect. Free cash flow does not have multiple definitions. It has a consistent definition across finance and accounting, representing the cash available for discretionary uses after required cash outlays. While the discretionary uses of free cash flow can vary depending on the company's specific circumstances, the definition of free cash flow remains the same.

In conclusion, the incorrect answer is E. Free cash flow is not a cash flow with multiple definitions because of its several discretionary uses.