Page 222: “this CAs outflow (from buying back shares when employees exercise options) should be subtracted from the CFO in order to calculate the true free cash flow.” I thought that this is regarded as a cash outflow due to financing?
it is CFF, but as an analyst you should show it in CFO… that is the diff b/t exercise px and market px times the # of shares exercised is the adjustment you should make. here’s a quickie explanation cut/paste of why- Firms will often repurchase stock to offset the dilutive effects of stock option compensation. The cash received from the exercise of the option and the outflow of cash from the share repurchase are both reported as financing activities in the cash flow statement. The tax benefits related to the recognition of compensation expense are reported as operating activities. This results in a mismatch of classifications. For analytical purposes, the net cash outflow to repurchase stock should be reclassified from financing activities to operating activities to better reflect the substance of the transaction.