free cash flow to firm model
Post on 13-Apr-2016
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Equity Valuation:
Free Cash Flow to Firm Model
http://www.tinyurl.com/BrackerFCFF
Introduction FCFF = Net Income + Depreciation – Capital
Expenditures – Increase in NC Working Capital + Interest*(1 – T)
FCFF = CF from Operating Activities + Interest * (1 – T) – Capital Expenditures
FCFF is discounted at the WACC instead of the cost of equity.
FCFF is used to get the value of the FIRM. To get the value of the equity, you must subtract out the value of debt.
Example Assume you have forecasted the following for firm X: Number of Shares Outstanding 400,000 Current Debt $5,000,000 Tax Rate 30% WACC 9.75% Year 1 Year 2 Year 3 Year 4 Net Income $800,000 $850,000 $900,000 $940,000 Depr. $200,000 $250,000 $225,000 $275,000 Cap. Exp. $350,000 $100,000 $400,000 $300,000 Inc. in NC WC
-$50,000
$100,000
-$75,000
$25,000
Interest $300,000 $320,000 $330,000 $350,000
Constant Growth Rate following Year 4 4%
Step 1: Forecast FCFF Values FCFF1 = $800,000 + $200,000 - $350,000 – (-$50,000) + $300,000*(1 – 0.3) = $910,000 FCFF2 = $850,000 + $250,000 - $100,000 – $100,000 + $320,000*(1 – 0.3) = $1,124,000 FCFF3 = $900,000 + $225,000 - $400,000 – (-$75,000) + $330,000*(1 – 0.3) = $1,031,000 FCFF4 = $940,000 + $275,000 - $300,000 – $25,000 + $350,000*(1 – 0.3) = $1,135,000
Step 2: Solve for value of all FCFF in Constant Growth Stage
V4 = $18,979,930
Step 3: Solve for Value of Firm
CF0 = 0 CF3 = 1,031,000 CF1 = 910,000 CF4 = 20,114,930 CF2 = 1,124,000 k = 9.75%
NPV = V0 = $16,406,609
Step 4: Convert to Value per Share Value of Equity = $16,406,609 - $5,000,000
= $11,406,609
P0 = 11,406,609/400,000 = $28.52
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