Operating Cash Flows, Cash Recovery Rates And Internal Rates Of Return

Abstract

Investors depend on financial reporting to assess the amounts and timing of future cash flows. Unfortunately, the historical cost basis may not provide sufficient information to judge future cash flows. The Financial Accounting Standards Board argues that the market price of common stock incorporates the market estimate of discounted future cash flows. This paper illustrates the calculation of operating cash flow on a per share (CFPS) basis and measures a firm’s internal rate of return by dividing the CFPS by the beginning of the year stock price reported by the Dow Jones Industrials. Although this measure may be affected by other market events, we believe it has potential information content and may provide investors with a tool to value stocks.