Dividend Free Cash flow Formula

Dividend Free Cash flow Formula

Dividend and Free cash flow has close relationship. Company can pay dividend, if it has sufficient free cash in the till. Therefore free cash flow is important monitoring tool for dividend policy. Dividend to free cash flow ratio can be calculated by the following formula

Dividend free cash Flow Ratio =           Dividend for Year    

                                                          Free Cash flow

Example

Company ABS has paid following dividend from 2001 to 2005.

Year              Earnings                      Dividend                  Free cash Flow

2001             100                             20 million                40 million

2002             100                             40 million                80 million

2003             100                             30 million                60 million

Solution

Year                    Dividend                 Free cash Flow       Dividend /Free cash Flow

2001                   20 million                40 million                20/40 =50%

2002                   40 million                80 million                40/80 = 50%

2003                   30 million                60 million                30/60 = 50%

Above example clearly shows that company is more focusing on cash flow for dividend decision than earning as dividend is 50% of free cash flow in each year.