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Corporate Strategy And Valuation > Topic 4 > Flashcards

Topic 4 Flashcards

1
Q

What is the free cashflow model

A

FCFM is the CF left over after a firm fulfils certain obligations

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2
Q

what is free cashflow to the firm

A

FCFF is the cf available to the companies suppliers of capital (including common stockholders , debtholders and preferred stockholders) minus all operating expenses paid and necessary investments in working capital and fixed capital made

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3
Q

What is the Free cashflow to equity

A

FCFE is the cf available to the companys common stockholders minus all operating expenses paid and necessary investments in working capital and fixed capital made
- Debtholders claim must be satisfies before money is paid to shareholders, so money paid on debt is not available for shareholders

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4
Q

what are the choices for fcfm

A
  1. No or low dividend payments
  2. Dividends paid do not have consistent relationship with performance
  3. Positive CF related to earnings
  4. Controlling perspective
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5
Q

Which two cases would the FCFF be chosen

A
  1. a levered company with negative FCFE

2. a levered company with a changing capital structure

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6
Q

How to calculate FCFF using NOPAT

A

FCFF = NOPAT + Non-cash charge NCC - FCinv investment in fixed capital - WCinv investment in working capital

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7
Q

What are two ways you can calculate NOPAT

A

NOPAT = NI + int(1-t)
NOPAT = EBIT(1-t)
= (EBITDA-DA)(1-t)

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8
Q

8 examples of a Non cash charge NCC

A
  1. Depreciation expenses
  2. Amortisation expenses
  3. write-down in the value of assets
  4. Deferred tax liabilities
  5. employee share-based compensation
  6. Deferred tax assets
  7. Capital losses
  8. Capital gains
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9
Q

what are examples of investment in fixed capital

A

PPE

Intangible assets

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10
Q

What are some FS discrepancies

A

FCFF derived from BS and CF statements may not be identical due to some events due to exchange of stock or debt may not appear on CF statement

ie Purchase inventory/FA by issuing shares
Convert accounts payable into equity
Currency transaction from overseas subsidiaries

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11
Q

How to calculate FCFF based on uses of FCF

A

FCFF = Change in cash balance + net payments to SH + net payments to debtholders

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12
Q

How can you calculate net payment to debtholders

A

= int(1-t) + debt repayments - borrowings

= int(1-t) - net borrowings

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13
Q

How can you calculate net payment to stockholders

A

= cash dividends + share repurchases - stock issuance

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14
Q

How to calculate FCFE based on uses of FCF

A

FCFE = change in cash balance + net payment to shareholders

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15
Q 
Do you think FCFE is affected by
Dividend payout
share repurchase
share issuance
new borrowings
A

NO
NO
NO
YES

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16
Q 
Do you think FCFF is affected by
Dividend payout
share repurchase
share issuance
new borrowings
A

NO
NO
NO
NO

17
Q 
Fo you think the values estimated from FCFEM is affected by the following activities
Dividend payout
share repurchase
share issuance
new borrowings
A 
NO
NO 
NO
YES 1.FCFE^ V^ 
2. r D/E^ B^ R^
18
Q

the values estimated from DDM and FCFEM are identical?

A

FCFE cash available to be paid out to stockholders
DDM cash actually returned to stockholders

in reality dividends< FCFE

19
Q

comparing dividends to FCFE

A 
less firms pay companies nowadays
bad time - reluctant to cut
good time - reluctant to increase
- future investment needs
- dividend tax
FCFEM correct for limitation of DDM
20
Q

when forecasting growth rate in FCFE what is the formula for g

A

g = equity reinvesment * noncash ROE

21
Q

What is the formula for equity reinvestment rate

A

(NI-FCFF)/NI

22
Q

What is the formula for noncash ROE

A

(NI- after tax income from cash and marketable securities ie FA)/(equity- cash and marketable securities)t-1

23
Q

What is the information needed for FCFF and FCFE forecast

A
  1. Forecast of sales or sales growth rate
  2. Forecast of operating profit margin
  3. Estimate of (FCinv-Dep)/Sales or sales growth
  4. Estimate of (WCinv)/ sales or sales growth
  5. an estimation of Debt Ratio

Corporate Strategy And Valuation (7 decks)

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