VALUATION METHOD - MIDTERM Flashcards
can be done by determining the present value of the net cash flows of the investment opportunity.
Discounted Cash Flow Analysis
in Financial Management, it has been discussed that a way to determine the value of an investment opportunity is by determining the actual cash generated by a particular asset.
Discounted Cash Flow Analysis
refers to the amount of cash available for distribution to both debt and equity claims of the business or asset. This is calculated from the net cash generated from operations and for investment over time.
Net Cash Flows
Net Cash Flows is preferred as basis of valuation if any of the following conditions are present:
- Company does not pay dividends.
- Company pays dividends but the amount paid out significantly differs from its capacity to pay dividends.
- Net Cash Flows and profits are aligned within a reasonable forecast period.
- Investor has a control perspective. If an investor can exert control over a company, dividends can be adjusted based on the decision of the controlling investor.
the best case for firms is to fund its investments wholly or partly through cash from operations.
Source of financing for needed investments
debt financing is an excellent financing strategy especially for expanding companies.
Reliance on debt financing
Significant disparities between cash flows and income may indicate earnings does not get converted to cash easily, suggesting low quality.
Quality of Earnings
2 Levels of Net Cash Flows:
- Net Cash Flows to the Firms
- Net Cash Flows to Equity
is the amount made available to both debt and equity claims against the company.
Net Cash Flows to the Firms
represents the amount of cash flows made available to the equity stockholders after deducting the net debt or the outstanding liabilities to the creditors less available cash balance of the company.
Net Cash Flows to Equity
refers to the cash flow available to the parties who supplied capital after paying all operating expenses, including taxes, and investing in capital expenditures and working capital as required by business needs.
Net Cash Flows to the Firms
Net cash flows to the firm can be computed or derived using the ff. approaches:
- Based from Net Income (or indirect approach)
- From Statement of Cash Flows
- From Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)
Basic measure of a firm’s profitability which refers to the bottom-line figure in an income statement.
Net Income Available to Common Shareholders
This is the amount left for the common shareholders after deducting all costs, expenses, depreciation, amortization, interest, taxes and dividends to preferred shareholders.
Net Income Available to Common Shareholders
pertains to non-cash items that are included in the computation of net income. The common non- cash items are the following:
a) Depreciation and amortization;
b) Restructuring charges;
c) Provisions for Doubtful Accounts.
Non-Cash Charges (Net)
this interest expense is a cash flow intended for the debt providers. After-tax interest expense is added back to net income since the objective of NCF is to measure the cash flows associated with the operating activities of the business.
After-Tax Interest Expense
this item represents the net investment in current assets such as receivables and inventory reduced by current liabilities like payable.
Working Capital Adjustments
The amount captured is based on the movements in these accounts from prior periods.
Working Capital Adjustments
pertains to cash outflows made to purchase or pay for capital expenditures that are required to support existing and future operating needs.
Investment in Fixed Capital
assumes that the price financed acceptable and has positive net present value.
Investment in Fixed Capital
This represents how much cash the company generated from its operations.
Cash Flow from Operating Activities
This shows how much cash is received from customers and how much cash outflows are paid to vendors. This is considered in computing for NCFF.
Cash Flow from Operating Activities
this represents how much cash is disbursed (received) for investments in (sale of) long- term assets like property, plant and equipment and strategic investments in other companies. This is considered in computing for NCFF.
Cash Flow from Investing Activities
this represents how much cash was raised (or paid) to finance the company.
Cash Flow from Financing Activities
