THE IMPACT OF FREE CASH FLOW ON THE FIRM VALUE

Profita, Arief Shylvie Kumara (2016) THE IMPACT OF FREE CASH FLOW ON THE FIRM VALUE. .. pp. 1-12.

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Abstract

This study aimed to investigate the impact of free cash flow on the firm value. Manufacturing companies that listed in Indonesia Stock Exchange is chosen to be the sample of research and 303 companies during 2012-2014 were selected as the sample. Firm value is the investor’s perception towards the degree of success of a company. According to several previous researches, free cash flow becomes one of the factors that affect firm value. Some research said that the more free cash flow generated by the company, the higher the firm value. The other research found distinct result where the higher free cash flow owned by the company, the lower the firm value. thus, there is still a conflicting result regarding the effect of free cash flow towards firm value. Free cash flow is calculated using the formula from Wang (2010) which later modified to adjust with certain regulation in Indonesia. Firm value is calculated by price to book value ratio. The result of study comes up with a conclusion that free cash flow has no positive impact on firm value. Thus, whether or not the company possesses free cash flow, it will not affect firm value as a whole. It is essential to have skillful manager that has the capability to manage free cash flow in order to utilize the cash for value-improving activity and not wasting it for unprofitable investment.

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