Free Cash Flow Valuation Flashcards
When should we use FCF analysis?
- When the company does not pay a dividend.
- Company pays a dividend but it shows no relationship with earnings or no capacity to pay dividends.
- FCF has alignment with profitability over the forecast period.
FCFF Formula
CFO - Capex + I(1-t)
Net income + Depreciation + I(1-T) - CAPEX - ΔWC
FCFE Formula
FCFF - I(1-t) + Net borrowings
FCFF starting at EBIT
EBIT(1−Tax rate)+Dep−Capex−ΔWC
FCFF starting at EBITDA
EBITDA(1-T) + (Depreciation X Tax rate) - Capex - ΔWC
ΔWC
(ΔAccounts receivibles + ΔInventory) - (Δaccounts payable)
(–$452 million – 0 ) - $210 million + $540 million = –$122 million
Investment in working capital is calculated by netting the increase in accounts receivable, the decrease in accounts payable, and the increase in other current liabilities
Value of firm formula
∑FCFF / (1+ WACC)^t
Value of equity formula
∑FCFF / (1+ r)^t
Value of Firm - MV debt
FCFF cash flow is avaliable to
Debt holders
Preferred shareholders
Common shareholders
FCFE cash flow is avaliable to
Common shareholders
FCFF starting at CFO
CFO + I(1-T) - CAPEX
One stage Value of firm formula
FCFF(1+g) / (WACC - g)
If Capex - Depreciation = 0
We’re investing at existing capacity
FCF is at a level to maintain existing capacity
If Capex - Depreciation > 0
Level of Capex to support growth
If Capex - Depreciation < 0
Unsustaniable
Formula forecasting FCFE
NI - (Capex - Depreciation)(1-Debt ratio) - ΔWC(1-Debt ratio)
What kind of weights should we use for FCFF when the companys capital strucutre will change overtime?
Targeted Market Structure Weights
When should Sensitivity analysis be performed?
Sensitivity analysis is performed to determine how sensitive the final valuation is to changes in the model’s input variable.
The analyst is most likely to use sensitivity analysis to examine how changes in the required return on equity affect the valuation estimate.
FCFE starting at CFO
CFO - Capex + Net borrowing
FCFF starting at CFO
CFO + I(1-T) - Capex
Scenario Analysis
Based on a particular scenario based on multiple inputs are changed to determine the effect of the valuation estimate
Sensitivity analysis
What-if-analysis
is performed to determine how sensitive the final valuation is to a change models input variable.
FCFE starting at NI
FCFE=NI+NCC−FCInv−WFCInv+Net borrowing.
