Final answer:
Capital expenditures refer to funds used to purchase or improve long-term assets and are deducted to calculate free cash flows, whereas cash dividends are paid to shareholders and don't reduce free cash flow. While CapEx impacts the free cash flow calculation, dividends impact the financing activities but not the free cash flow directly.
Step-by-step explanation:
Capital expenditures and cash dividends play distinct roles in the calculation of free cash flows for a company. Capital expenditures, often referred to as CapEx, are funds used by a firm to acquire, upgrade, and maintain physical assets such as property, plants, and equipment. These are considered investments in the business infrastructure and are crucial for long-term growth. On the other hand, cash dividends are payments made to shareholders out of the company's profits or reserves. While capital expenditures are one of the key components subtracted from operating cash flow to determine free cash flow, cash dividends are not generally subtracted in free cash flow calculation; instead, they are part of the financing section of a cash flow statement.
When assessing financial capital in the context of stocks, both potential capital gains from the future sale of the stock and dividends to be paid should be taken into account. Financial investors may have differing opinions on these aspects, which is reflective of their varying levels of optimism regarding the future prospects of the stock. This outlook impacts the present discounted value of the financial asset and, subsequently, the amount an investor is willing to pay for it.