A February 2016 analyst report questioned whether the professional networking company LinkedIn was being run for the
Question:
A February 2016 analyst report questioned whether the professional networking company LinkedIn was being run for the benefit of shareholders or management. The report noted that in the previous year LinkedIn showed an operating cash flow of $807 million. From that sum, the company invested $507 million in new assets, leaving free cash flow of $300 million. On the face of it, that seems like good news. However, the analyst’s report noted that LinkedIn’s cash flow was heavily influenced by its employee stock option plan. Under this plan, employees have the right to buy stock at a fixed price. That right is especially valuable if the market price of the company’s stock rises. When employees exercise their right to buy, they write a check to LinkedIn and the company issues new shares. LinkedIn’s financial records showed that it received $510 million from employees purchasing stock at below-market prices. Excluding that, the company’s free cash flow was negative.
Free cash flow is often considered a more reliable measure of a company’s income than reported earnings. In what possible ways might corporate accountants change earnings to present a more favorable earnings statement?
Free Cash FlowFree cash flow (FCF) represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. Unlike earnings or net income, free cash flow is a measure of profitability that excludes the...
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Principles of Managerial Finance
ISBN: 978-0134476315
15th edition
Authors: Chad J. Zutter, Scott B. Smart