Free Cash Flow Valuation Flashcards
Firm Value from FCFF
FCFF discounted at WACC
Equity Value from FCFE
FCFE discounted at required return on equity
Equity Value from Firm Value
Firm Value - Market Value of Debt
FCFF from NI
FCFF = (NI + NCC - WCInv) + [ Int (1-tax) ] - FcInv
CFO
NI + NCC - WcInv
NCC
amortization of intangibles ADDED back
restructuring charges ADDED back
any other non-cash loss ADDED back
gains and losses on long-term assets REMOVED
income from restructuring charge reversals SUBTRACTED
FcInv
CapEx - Proceeds from sales of long-term assets
FcInv (if no assets were sold during year)
= CapEx = ( END Gross PPE - BEGIN Gross PPE)
FcInv (if no assets were sold during year)
= END Net PPE - BEGIN Net PPE + depreciation
Gross PPE
before depreciation
Net PPE
after depreciation
FCFF (from EBIT)
FCFF = [ EBIT * (1-tax) ] + Dep - FcInv - WcInv
FCFF (from EBITDA)
FCFF = [ EBITDA * (1-tax) ] + Dep(tax) - FcInv - WcInv
FCFF (from CFO)
FCFF = CFO + [ Int * (1-tax) ] - FcInv
FCFE (from FCFF)
FCFE = FCFF - [ Int (1-tax) ] + net borrowing
FCFE (from NI)
FCFE = NI + NCC - FcInv - WcInv + net borrowing
FCFE (from CFO)
FCFE = CFO - FcInv + net borrowing
FCFF with Preferred Stock
Add Pfd stock back to FCFF (assuming NI is to common shareholders after Pfd divs have been subtracted out)
FCFE with Preferred Stock
Add Pfd stock new debt borrowing and net issuances by the amount of the Pfd stock
Uses of FCFF
Uses FCFF = changes in cash balances + net payments to debt providers + net payments to equity stakeholders
Uses of FCFE
Uses FCFE = changes in cash balances + net payments to equity holders
Forecast FCFF or FCFE (historical with a growth rate)
Multiply by 1+g Assumes growth will be constant and fundamental factors maintained
Forecast FCFE (use target debt-to-asset ratio)
FCFE = NI - [ (1-DR) * (FcInv - Dep) ] - [ (1 - DR) * WcInv ]
Effect of dividends, share repurchases, and share issues
NONE. All are a use of cash; do not affect the cash flow available.
Effect of changes in leverage
Small effect on FCFE. Example: decrease in leverage via debt repayment decrease FCFE in current year but increase forecasted FCFE in later years.
Single-Stage FCFF Model
Value of firm = FCFF1 / (WACC - g) = FCFF0 * (1+g) / (WACC - g)
Single-Stage FCFE Model
Value of equity = FCFE1 / (r - g) = FCFE0 * (1+g) / (r - g)
Are FCFF and FCFE growth rates usually the same or different?
Different
Two-Stage Model Examples
(a) FCFF in which FCFF is projected to grow at 20% for first 4 years and then 4% each year thereafter
(b) FCFE in which FCFE declines form 20% to 4% over 4 years and then stays at 4% forever
(c) FCFE model in which sales grow at 20% for 4 years, net profit margin constant at 8%, fixed capital investment equal to 60% of dollar INCREASE in sales, working capital investment equal to 25% of dollar INCREASE in sales and debt ratio is 50%. Given starting sales, we can forecast FCFE for the first 4 years.
Terminal Value at the end of the first growth stage
Apply a single-stage free cash flow model at the point in time when growth settles to its long-run level
Approaches for calculating Terminal Value
There are two:
(a) use a single-stage model
(b) use a multiple
Terminal Value using Multiple
Terminal Value in year n = trailing PE * earnings in year n
Terminal Value in year n = leading PE * forecasted earnings in year n+1
