Firms create value by generating increasing amount of free cash flow, a residual of improvements to return on invested capital (ROIC), economic profit (free cash flow minus a capital charge) and additions to the capital base. Dividends and share buybacks obviously do not accomplish those goals.
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For additional information and extensive analysis on free cash flow, cost of capital and return on invested capital, pre-order- “Security Valuation and Risk Analysis” out this fall from McGraw-Hill.
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