Question: Free Cash Flow for General Motors (Medium) For the first nine months of2005, General Motors Corporation reported the following in its cash flow statement. GM runs an automobile operation supported by a financing arm, and both activities are reflected in these statements.
Net interest paid during the 2005 period was $4,059 million, compared with $3,010 million in the corresponding 2004 period. General Motors' tax rate is 36 percent. An analyst made a calculation of free cash flow from these numbers as follows (in millions):
She opened her report to her clients, written the day after GM's third quarter report was published, with the words, "GM has dramatically increased its free cash flow. As a result, we are edging towards upgrading our recommend ation from SELL to HOLD." Calculate the appropriate free cash flow number for the two nine-month periods. What mistakes is the analyst making in suggesting that the increase in free cash flow is good news?