Lecture 1 - FCF

Question 1

goal of financial manager

Answer 1

= max shareholder value

• avoiding bankruptcy: needs to be satisfied, but not ultimate goal
• max market share: doesn’t necessarily = higher profits
• max manager’s wealth: doesn’t max unless incentivized

Question 2

what kind of CF are we interested in?

Answer 2

incremental CF

additional CF resulting from implementation of project

Question 3

FCF

Answer 3

aka incremental CF
all CF that arises from normal business activity
can be distributed to compensate all CAPITAL providers

Question 4

incremental CF examples

Answer 4

opportunity costs
incidental effects (synergy, erosion)
taxes, tax saving from depr
Δ NWC

NOT SUNK COSTS

Question 5

FCF =

Answer 5

OCF - NCS - Δ NWC

Question 6

OCF

Answer 6

captures incremental rev & costs; corrects for interest exp and depr

Question 7

OCF =

Answer 7

EBIT*(1-Tax) + Depr

Question 8

EBIT =

Answer 8

Sales - COGS - SG&A - Other Op exp (including depr)

Question 9

why do we remove Tax * EBIT?

Answer 9

to undo the tax shield the firm receives by expensing int before taxes

Question 10

NCS =

Answer 10

ending NFA - beg NFA + Depr

Question 11

WC =

Answer 11

current assets - current liabilities

Question 12

dealing with inflation

Answer 12

if using nominal CF, discount w/ nominal discount rate

if using real CF, discount w/ real discount rate

Question 13

NFA =

Answer 13

gross fixed assets - accum depr

Question 14

exclude from NWC:

Answer 14

cash & marketable securities (bc firms stock of excess liquidity)
notes payable / ST borrowing

AKA any CF’s relating to firm’s financing