What best describes 'free cash flow'?

Free cash flow is defined as the cash generated by a company that is available for distribution to investors, such as shareholders and debtholders, after the company has made the necessary capital expenditures to maintain or expand its asset base. This concept is crucial for investors because it highlights the actual cash that a company has on hand after covering its operational costs and reinvesting in its business, making it a key indicator of financial health.

Investors prefer to evaluate free cash flow because it provides a clearer picture of a company's financial flexibility. This cash can be used for dividends, stock buybacks, paying down debt, or reinvesting in growth opportunities, which are all important aspects for stakeholders wanting to understand the company's capacity to generate returns.

The other options do not capture the essence of free cash flow. For example, cash that must be retained within the firm fails to reflect the cash's availability to investors. Similarly, cash restricted for investment in new projects does not allow for distributions to investors, as it must be used for capital expenditures rather than being available for dividends or other distributions. Lastly, cash flow forecasted based on historical data does not focus on the liquidity aspect and actual cash generation that defines free cash flow, rather it is a tool for financial planning that does