Estimating Cash Flows Flashcards
What tax rate should be used for after-tax operating income (earnings and free cashflows?
Marginal moving to Effective for young companies.
Effective for mature companies or to stay conservative.
Cannot defer taxes forever.
What tax rate should be used for cost of debt?
Marginal
Interest saves money at the margin.
Companies borrow money where they get the most benefit (i.e. they want to pay the marginal rate to get the biggest benefit).
Cash Flow to Firm (FCFF) formula
EBIT * (1 - tax rate)
- (CapEx - Depreciation)
- Change in non-cash Working Capital
= Free Cash Flow to Firm (FCFF)
Cash Flow to Equity (FCFE) formula
Net Income - (CapEx - Depreciation) - Change in non-cash Working Capital - (Principal Repaid - New Debt Issues) //Positive if debt went up - Preferred Dividends = Free Cash Flow to Equity (FCFE)
Or..
Dividends + Stock Buybacks
Reinvestment formula
= CapEx - Depreciation + Change in non-cash Working Capital
Or…
= 1 - Reinvestment Rate
What types of accounting items should be included in debt?
Operating Leases
Contractual Commitments
R&D
Acquisitions
Return on Capital formula
EBIT * (1 - tax rate) /
(BV of Debt + BV of Equity - Cash)
Useful measure of return relates the operating income to the capital invested in the firm, where capital is defined as the sum of the book value of debt and equity, net of cash.
Damodaran, Aswath. Investment Valuation: Tools and Techniques for Determining the Value of any Asset, University Edition (Kindle Locations 1798-1799). Wiley. Kindle Edition.
To create value, a Return on Capital must be higher/lower than Cost of Capital?
Higher
Net CapEx formula
= Capital Expenditures - Depreciation
Will Net CapEx be high or low for high growth companies?
High
Adjusted Net CapEx formula
= Net CapEx
+ R&D Expense (current year) - Amortization of R&D
+ Acquisitions
Working Capital (accounting)
= Current Assets - Currents Liabilities
Working Capital (valuation)
= Non-cash Current Assets (Inventory, A/R)
- Non-cash Current Liabilities (A/P)
