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Worked-example setupScope and assumptions
- Cedar Trail is fictional, and every amount belongs to the same annual period.
- Average total assets and average total equity use aligned opening and ending balances under the same reporting basis.
- The stated free-cash-flow formula deducts capital expenditure and dividends from net cash provided by operating activities.
- Period
- One annual period
- Units
- US dollars and times
- Rounding
- Whole dollars and two decimal places for the equity multiplier
Cedar Trail reports average total assets of $960,000 and average total equity of $400,000 for the year. Net cash provided by operating activities is $150,000. Capital expenditure is $48,000, and dividends paid are $12,000. For this example, the free-cash-flow formula subtracts both amounts from operating cash flow.
Compute the equity multiplier
$960,000 average total assets / $400,000 average total equity = 2.40
The result means that each average equity dollar supports $2.40 of average recognized assets under the stated definitions. It does not identify the mix, cost, maturity, or risk of the liabilities that support the other asset dollars.
Compute the declared free cash flow
$150,000 operating cash flow - $48,000 capital expenditure
- $12,000 dividends = $90,000
The $90,000 result follows Cedar's stated formula. Free cash flow is not a required United States GAAP subtotal, and another company may use a different set of deductions. The result does not prove that $90,000 is available after all operating, investing, and financing needs.
Keep the measures separate
The equity multiplier describes a relationship between average statement-of- financial-position amounts. The free-cash-flow measure starts with an annual cash-flow subtotal and stated deductions. One number does not explain or verify the other.
Use the independent assessment to recompute both measures with different inputs. State the formula and period before interpreting either result.
Verified calculation · leverage free cash flow analysis
The curriculum loader recomputed this example before it entered the site build. Expand any structured input to inspect the stated facts.
- scenarios
- 1 field
Inspect data
{
"cedar": {
"average_total_assets": 960000,
"average_total_equity": 400000,
"deductions": {
"capital_expenditure": 48000,
"dividends": 12000
},
"operating_cash_flow": 150000,
"reported_equity_multiplier": 2.4,
"reported_free_cash_flow": 90000
}
}Recomputed result
| Measure | Value |
|---|---|
| average total assets | 960,000 |
| average total equity | 400,000 |
| capital expenditure | 48,000 |
| dividends | 12,000 |
| equity multiplier | 2.4 |
| free cash flow | 90,000 |
| operating cash flow | 150,000 |
| total deductions | 60,000 |