Free Cash Flow Valuation

Question 0

What is free cash flow to equity

Answer 0

Cash available to common stockholders after funding capital requirements, working capital needs, and debt financing requirements

Question 1

What is free cash flow to the firm

Answer 1

Cash available to all firms investors (includes shareholders and bond holders) after operations

Question 2

Which discount rate to use for FCFF and FCFE

Answer 2

WACC for FCFF

Cost of equity for FCFE

Question 3

When to use FCF model instead of DDM

Answer 3

Firm does not pay cash dividends
Dividend policy doesn’t reflect long run profitability
Firm is takeover target (FCF takes control perspective)

Question 4

Four ways to calculate FCFF

Answer 4

NI+dep+ (int*(1-tax) - FCInv - WCInv

(EBIT*(1-tax) + dep - FCInv - WCInv

EBITDA(1-tax) + (deptax) - FCInv - WCInv

CFO + (int*(1-tax) - FCInv

Question 5

Four ways to calc FCFE

Answer 5

FCFF - (int*(1-tax)) + net borrowing

NI+dep+FCInv - WCInv+ net borrow

CFO - FCInv + net borrowing

NI - (1-DR)(FCInv-dep) - (1-DR) (WCInv)

Question 6

What items have no effect on FCFE and FCFF

Answer 6

Dividends
Share repurchases
Share issues
Leverage (minor impact to FCFE)

Question 7

Forecast FCF by…

Answer 7

Calculate base FCF and apply growth rate

Or forecast each FCF component

Question 8

Calc FCFF firm value

Answer 8

Firm value = FCFF1
———–
WACC - g

Question 9

Calc equity value (FCFE)

Answer 9

Equity val = FCFE1
———-
r - g

Question 10

How to do two stage FCF framework

Answer 10

1. Chart FCFs in high growth period
2. Single stage FCF model to calc terminal value
3. Discount interim FCF and terminal value to time 0

WACC for FCFF, r for FCFE