Topic 8: Free Cash Flow Estimation (Part 1)

Question 1

How do you calculate Cash Flow?

Answer 1

Cash flow = Cash Flow from Operations + Cash Flow from Investing + Cash Flow from Financing

Question 2

How do you calculate Cash Balance at the end of the period?

Answer 2

Cash balance at end of period = Cash balance at start of period + Cash Flow

Question 3

What is the difference between Finance and accounting?

Answer 3

• Accounting looks backwards on performance and reports what happened
• Finance focus on the ability of a company to generate future surplus cash (free cash flow) for its debt and equity investors

Question 4

What is Free Cash Flow?

Answer 4

The incremental cash flows that are leftover after paying all operational expenses, to pay the firm’s capital providers (equity and debt investors).

Question 5

What is Incremental Cashflow

Answer 5

The potential increase or decrease in a company’s cash flow related to the acceptance of a new project or investment in a new asset.

Question 6

How to determine if it is the Cash flow is incremental?

Answer 6

If there is a difference in cash flow between the project going ahead and not going ahead?

Question 7

What are the Types of Cash flow?(3)

Answer 7

• Initial Outlay/Capital expenditure
• Ongoing Cash Flows
• Terminal Cash flows

Question 8

What are Initial Outlay/Capital expenditure (Capex) cash flows?

Answer 8

Investments on fixed and variable Operating assets

Question 9

What are some Examples of Initial Outlay incremental cash flow?(2)(2)

Answer 9

Fixed:
o Purchasing equipment
o Initial development cost

• Variable:
  Increase in:
  o Inventory
  o Raw Materials

Question 10

What are Ongoing Cash Flows?

Answer 10

Focuses on Cash flow related to operations

Question 11

What are some Examples of Ongoing incremental cash flows? (5)

Answer 11

• Incremental Revenue/Costs
• Taxes
  Change in:
• Inventory
• Raw Materials
• Accounts receivable

Question 12

What are Terminal Cash flows

Answer 12

Includes all actual cash inflows and outflows that involve terminating or winding down a project.

Question 13

What are some Examples of Terminal incremental cash flows?(4)

Answer 13

• Sale of Equipment
• Shutdown costs
• Decrease in:
  o Inventory
  o Raw materials

Question 14

How is Terminal Cash flow calculated?

Answer 14

Terminal cash flows = Shutdown costs + Recovery of NWC + After Tax Salvage

Question 15

What are shut down costs?

Answer 15

one‐time costs when a project is shut down

Question 16

What is Recovery of Net working Capital(NWC)?

Answer 16

Prior investment in working capital is recoverable at book value and can be reused elsewhere in the firm.

Question 17

What is After‐tax salvage cash flow?

Answer 17

the net cash flow received for selling an asset