Cash Flows Estimation Flashcards
What is the difference?
Does FCF include financing activities ?
No we are looking at a firms operating activities excluding any financing decisions.
What does EBITDA mean and what does EBIT mean?
EBITDA = Earnings before interest, taxes, depreciation, amortisation. ( Revenue - costs = EBITDA.
EBIT = Earnings before interest ( operating income) ( EBITDA - DEP)
What is the formula for the free cash flow?
What are the items explain them?
We will come back to salvage value later.
EBIT = Earnings before interest ( operating income or EBITDA - DEP&AMORTISITION).
(1-tax rate) - effective tax rate = tax rate that the company pays on average
CAPEX capital expenditures ( e.g. PPE)
Change in NWC ( or increase in NWC) which are non-cash CA - non interest bearing CL.
What is cash flow to equity holders
Change in debt = Amount Borrowed - Amount of Principal Repaid.
What if depreication is 0, what if depreication is 20?
What is the difference between Depreication and Amoritzation?
1) Depreciation: allocates cost of CAPEX over time to match revenues it generates
2) Amortization: same, but for intangible (e.g., patents) rather than tangible assets
How do you calculate depreciable amount assuming straight line?
What is salvage value but how we looking at it in this FCF context?
Salvage value = residual value. ( if we were to sell this machine basically)
If gain on sale = 0, there is no tax consequence, Cash flow is the sale price.
What is another to express FCF?
A company is thinking of building a plant to make bicycles. Plant and equipment costs $1 million. It lasts for five years and has no salvage value at the end of that time. The costs of
running the plant are expected to be $100k per year. The revenues from selling the bikes are expected to be $375k per year. All cash flows occur at the end of the year. IRS rules prescribe straight-line depreciation over five years. The firm faces a corporate tax rate of 35%. The opportunity cost of capital for this type of project is 10%. Calculate NPV, should it go ahead? ( notice because its asking for NPV the Capex already taken into account)
yes
So when calculating NPV, we use,FCFs are the cash flows ‘left over’ to distribute to nvestors after all operating expenses and capital expenditures have been
made, assuming the project is all-equity financed, as a numerator. What do we exclude in our calculation?
Estimate cash flows on an incremental basis
Include opportunity costs ( if investing in a particular project causes other projects to have lower cash flows, you must include these incremental cash flows in your project valuation)
Ignore sunk costs ( incurred prior to investment decision)
Include all externalities
What is the terminal value
PV of future cash flows, explicit after the forecasting period we calculated cash flows for. it assumes firm grows a constant rate.
What is the formula for the terminal value ( what should we predict for g sometimes) ?
TV at time t is the CF we receive in t+1 time discounted by r-g, if we assume the firm grows .
forever.
g is usually set to expected nominal economic growth ( g is also adjusted to inflation as well as r ( real interest rate)
g ( reasonable forecast of g is 4-6%)
