The impact of free cash flow on market value of firm
The impact of free cash flow on market value of firm

Summary/Abstract: This paper constitutes an attempt to investigate the relationship between Free Cash Flow to Equity (FCFE) and the firm’s market value of pharmaceutical sector of Jordan, by using valuation technique, wherein the rift between theory and practice still needs to be accommodated, taking into consideration the relationship of FCFE, Net Income, Net Capital Expenditure, Working Capital and Debt Position. The paper uses panel data, covering the period 2004-2010. The determination of a company’s market value is a difficult decision taking into account several antagonistic factors, such as risk of debt and capital expenditure, in times when the economic environment in which the company operates is unstable. Therefore, the choice among the ideal equation of FCF to Equity can affect the market value of a firm, as much as profit rate can. The results show that the market values of a firm are assessed by the Free Cash Flow to Equity. Our results are in accordance with the hypothesis that FCF to Equity have significant positive effect on stock market of a firm. Our findings add to the understanding of the determinants of the market value of firm effect on the FCFE projected decision.

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