free cash flow
Post on 25-Dec-2014
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Free Cash FlowValuation
Definition
Bond
Equity
Alternative Investments
Bond
Equity
Alternative Investments
EquityValuation
RelativeAbsolute
EquityValuation
EquityValuation
RelativeAbsolute
DiscountedCashFlow
Relative
EquityValuation
Absolute
1. DDM2. FCF3. Residual
Income
EquityValuation
1. DDM2. FCF3. Residual
Income
FreeCash Flow
FreeCash Flow
FreeCash Flow
to
Distribute
Freeto
DistributeTo Whom?
Capital Providers
Capital Providers
LendersEquity InvestorsPreferred Shareholders
Capital Providers
LendersEquity InvestorsPreferred Shareholders
Capital Providers
LendersEquity InvestorsPreferred Shareholders
FCFF
FCFE
FCFFFirmFCF to the
FCFE
FCFFFirmFCF to the
FCFEEquityFCF to
$4,000,000
Calculation
FCFF=NI
+ NCC- WCInv- FCInv+ Int*(1-t)
Net IncomeNon-Cash ChargeWorking Capital Inv.Fixed Capital Inv.After-tax interest
FCFF=NI
+ NCC- WCInv- FCInv+ Int*(1-t)
Net IncomeNon-Cash ChargeWorking Capital Inv.Fixed Capital Inv.After-tax interest
NCC ≈ D&A
FCFF=NI
+ NCC- WCInv- FCInv+ Int*(1-t)
Net IncomeNon-Cash ChargeWorking Capital Inv.Fixed Capital Inv.After-tax interest
FCFF=NI
+ NCC- WCInv- FCInv+ Int*(1-t)
Net IncomeNon-Cash ChargeWorking Capital Inv.
WCInv=(CA1-CA0)-(CL1-CL0)Current Asset Current Liability
FCFF=NI
+ NCC- WCInv- FCInv+ Int*(1-t)
Net IncomeNon-Cash ChargeWorking Capital Inv.
WCInv=(CA1-CA0)-(CL1-CL0)Current Asset Current Liability
Cash and Cash Equivalents
FCFF=NI
+ NCC- WCInv- FCInv+ Int*(1-t)
Net IncomeNon-Cash ChargeWorking Capital Inv.
WCInv=(CA1-CA0)-(CL1-CL0)Current Asset Current Liability
Cash and Cash Equivalents
FCFF=NI
+ NCC- WCInv- FCInv+ Int*(1-t)
Net IncomeNon-Cash ChargeWorking Capital Inv.Fixed Capital Inv.After-tax interest
FCFF=NI
+ NCC- WCInv- FCInv+ Int*(1-t)
Net IncomeNon-Cash ChargeWorking Capital Inv.Fixed Capital Inv.After-tax interest
Interest rate 10%
Tax rate 25%
Total capital 400 400 400
Debt ‐ 200 400
Equity 400 200 ‐
EBIT 250 250 250
Interest ‐ 20 40
EBT 250 230 210
T 63 58 53
NI 188 173 158
FCFF= FCFE=NI
+ NCC- WCInv- FCInv+ Int*(1-t)
NI+ NCC- WCInv- FCInv+ Net Borrowing
FCFF= FCFE=NI
+ NCC- WCInv- FCInv+ Int*(1-t)
NI+ NCC- WCInv- FCInv+ Net Borrowing
Interest rate 10% WCInv 0Tax rate 25% FCInv 0Total capital 400
CapitalStructureDebt ‐
Equity 400
EBITDA 300
IncomeStatement
D&A 50
EBIT 250
Interest ‐
EBT 250
T 63
NI 188
FCFF 238 FCF
FCFE 238
Investment Return=238/400=59.5%
Interest rate 10% WCInv 0Tax rate 25% FCInv 0Total capital 400 400 400
Debt ‐ 200 400 Equity 400 200 ‐
EBITDA 300 300 300 D&A 50 50 50
EBIT 250 250 250 Interest ‐ 20 40
EBT 250 230 210 T 63 58 53
NI 188 173 158 FCFF 238 238 238 FCFE 238 223 208
FCFF Ignores Capital Structure
Capital StructureMatters to
FCFE
FCFF=NI
+ NCC- WCInv- FCInv+ Int*(1-t)
CFO
US GAAP
FCFF=NI
+ NCC- WCInv- FCInv+ Int*(1-t)
CFO
EBIT
FCFF=NI
+ NCC- WCInv- FCInv+ Int*(1-t)
CFO
EBITEBITDA
FCFE=NI
+ NCC- WCInv- FCInv+ Net Borrowing
CFO
EBITEBITDA
Valuation
Sell
DebtofMVValueFirmvalueEquity
-=
( )∑∞
1= +1=
tt
t
WACCFCFF
valueFirm
∑∞
1= )+1(=
tt
t
rFCFE
valueEquity
rEquityMVDebtMV
EqutiyMV
TrEquityMVDebtMV
DebtMVWACC
d
)(+)()(
+
)-1(×)(+)(
)(=
gWACCgFCFF
gWACCFCFF
valueFirm
-)+1(
=
-=
0
1
grgFCFE
grFCFE
valueEquity
-)+1(
=
-=
0
1
Interest rate 10% WCINv 0
Tax rate 25% FCInv 0
Re 15%
g 5%
Total capital 400 400 400
Debt - 200 400
Equity 400 200 -
FCFF 238 238 238
FCFE 238 223 208
WACC 15% 11% 8%
Firm value 2,494 3,990 9,975
Equity value 2,494 2,336 2,179
Investment Return=(2494-400)/400=523.5%
nn
n
tt
t
WACCgWACCFCFF
WACCFCFF
valueFirm
)+1(1
)-(+
)+1(=
1+
1=∑
nn
n
tt
t
rgrFCFE
rFCFE
valueEquity
)+1(1
-+
)+1(=
1+
1=∑
Two-Stage
borrowingNetWCInv
DepFCInvNI
FCFE
+-
)-(-=
))(-1(-)-)(-1(-
=
WCInvDebtRatioDepFCInvDebtRatio
NIFCFE
Α=∆
-CInvSales
DepFΒ=
∆SalesWCInv
Forecasting
FCF VS.
DDM
YOU=Owner
Recap
1. FCF
2. FCFF
3. FCFE
Remember
Solve
Thank You!
liyati@sina.cn
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