Which is the oldest mention to Free cash flow as we know it today?

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Permalink Reply by Alexander Samorokov on May 31, 2010 at 12:08pm

If I am not mistaken, the FCF was mentioned in the "The theory of investment value by John Burr Williams 1938

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Permalink Reply by Sachidanand (Sacha) Singh on June 1, 2010 at 3:00am

Is it so? I think the notion that value of firm is present value of cash flows it generates was first enunciated by M&M. I (alas) have not read their original paper and cannot say whether they used the word cash flow or FCF.

(In their book on valuation (not the one on Corp Finance by Copeland & Weston) Copeland et al recognise their intellectual debt to M&M.)

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Permalink Reply by Tariq Syed on May 31, 2010 at 2:14pm

The oldest principle, I know ; don't borrow money (source unknown).

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Permalink Reply by Gregory Odum on June 1, 2010 at 8:28pm

Debt is always cheaper than Equity. It is best to borrow as much as feasible, based on bankruptcy theory.

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Permalink Reply by Kenneth Rose on June 1, 2010 at 6:10am

Quote from wiki..

"Discounted cash flow calculations have been used in some form since money was first lent at interest in ancient times. As a method of asset valuation it has often been opposed to accounting book value, which is based on the amount paid for the asset. Following the stock market crash of 1929, discounted cash flow analysis gained popularity as a valuation method for stocks. Irving Fisher in his 1930 book "The Theory of Interest" and John Burr Williams's 1938 text 'The Theory of Investment Value' first formally expressed the DCF method in modern economic terms."

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Permalink Reply by Sachidanand (Sacha) Singh on June 1, 2010 at 6:27am

Googled John Burr Williams and read teh preface of The Theory of Interest. It seems Williams concentrated on, as did others then, on discounting dividends rather than cash flows. Please check it out: http://www.numeraire.com/theory.htm

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Permalink Reply by Ignacio Vélez Pareja on June 1, 2010 at 7:00am

Thanks all of you for your replies. Please remember: the term is FREE CASH FLOW. It is not DCF, nor cash flow. M&M do not use FCF. Burr neither.
Best

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Permalink Reply by Bill M Wright on June 1, 2010 at 8:54pm

You are correct. I do not know the earliest date but I know In a 1986 paper in the American Economic Review, Michael Jensen noted that Free Cash Flows allowed firms' managers to finance projects earning low returns which therefore might not be funded by the equity or bond markets. Examining the US oil industry, which had earned substantial free cash flows in the 1970s and the early 1980s, he wrote that

the 1984 cash flows of the ten largest oil companies were $48.5 billion, 28 percent of the total cash flows of the top 200 firms in Dun's Business Month survey. Consistent with the agency costs of free cash flow, management did not pay out the excess resources to shareholders. Instead, the industry continued to spend heavily on [exploration and development] activity even though average returns were below the cost of capital. Jensen also noted a negative correlation between exploration announcements and the market valuation of these firms - the opposite effect to research announcements in other industries.

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Permalink Reply by Gregory Odum on June 1, 2010 at 9:01pm

interesting (thanks for the post)

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Permalink Reply by Ignacio Vélez Pareja on June 1, 2010 at 9:09pm

Great, Bill
Thanks a lot. The paper can be downloaded from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=99580. It is dated 1986 as follows: American Economic Review, Vol. 76, No. 2, May 1986
Now we are 2 years back.
I have an old book: Corporation Finance, by Edward Sherwood Mead, Ph.D, from Wharton School, printed in 1933 and no mention of Free Cash flows. Not even present value, nor Net Present Value or IRR are mentioned!
Best

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Permalink Reply by Bill M Wright on June 1, 2010 at 9:28pm

Thanks, good to be of some value on this topic...even if only as a historian. I don't recall it being discussed in my 70's finance books nor 78-79 MBA finance books. But purhaps it was discussed in some Journal of Finance or Accounting (prior to 86) which would have contained the most current thinking of the day. DCF, NPV & IRR were all part of college Finance classes in the early 70's.

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Permalink Reply by Gregory Odum on June 1, 2010 at 8:30pm

Not sure where it was mentioned first, but it would seem to me that the concept of FCF is as old as finance itself.

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