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Free Cash Flow

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Free Cash Flow

  1. 1. Free Cash FlowValuation
  2. 2. Definition
  3. 3. AlternativeBond Investments Equity
  4. 4. AlternativeBond Investments Equity
  5. 5. EquityValuation
  6. 6. Absolute Relative Equity Valuation
  7. 7. Absolute Relative EquityDiscountedCashFlow Valuation
  8. 8. Absolute Relative1. DDMEquity2. FCF Valuation3. Residual Income
  9. 9. 1. DDMEquity2. FCF Valuation3. Residual Income
  10. 10. FreeCashFlow
  11. 11. FreeCashFlow
  12. 12. FreeCash toFlow Distribute
  13. 13. Free to Distribute To Whom?
  14. 14. Capital Providers
  15. 15. Capital ProvidersLendersEquity InvestorsPreferred Shareholders
  16. 16. Capital ProvidersLendersEquity InvestorsPreferred Shareholders
  17. 17. Capital ProvidersLendersEquity InvestorsPreferred Shareholders
  18. 18. FCFFFCFE
  19. 19. FCFFFCF to the Firm FCFE
  20. 20. FCFFFCF to the Firm FCFEFCF to Equity
  21. 21. $4,000,000
  22. 22. Calculation
  23. 23. FCFF= NI Net Income+ NCC Non-Cash Charge- WCInv Working Capital Inv.- FCInv Fixed Capital Inv.+ Int*(1-t) After-tax interest
  24. 24. FCFF= NI Net Income+ NCC Non-Cash Charge- WCInv Working Capital Inv.- FCInv Fixed Capital Inv.+ Int*(1-t) After-tax interest
  25. 25. NCC ≈ D&A
  26. 26. FCFF= NI Net Income+ NCC Non-Cash Charge- WCInv Working Capital Inv.- FCInv Fixed Capital Inv.+ Int*(1-t) After-tax interest
  27. 27. FCFF= NI Net Income+ NCC Non-Cash Charge- WCInv Working Capital Inv.- FCInv+ Int*(1-t) Current Asset Current LiabilityWCInv=(CA1-CA0)-(CL1-CL0)
  28. 28. FCFF= NI Net Income+ NCC Non-Cash Charge- WCInv Working Capital Inv.- FCInv+ Int*(1-t) Cash and Cash Equivalents Current Asset Current LiabilityWCInv=(CA1-CA0)-(CL1-CL0)
  29. 29. FCFF= NI Net Income+ NCC Non-Cash Charge- WCInv Working Capital Inv.- FCInv+ Int*(1-t) Cash and Cash Equivalents Current Asset Current LiabilityWCInv=(CA1-CA0)-(CL1-CL0)
  30. 30. FCFF= NI Net Income+ NCC Non-Cash Charge- WCInv Working Capital Inv.- FCInv Fixed Capital Inv.+ Int*(1-t) After-tax interest
  31. 31. FCFF= NI Net Income+ NCC Non-Cash Charge- WCInv Working Capital Inv.- FCInv Fixed Capital Inv.+ Int*(1-t) After-tax interest
  32. 32. 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 
  33. 33. FCFF= FCFE= NI NI+ NCC + NCC- WCInv - WCInv- FCInv - FCInv+ Int*(1-t) + Net Borrowing
  34. 34. FCFF= FCFE= NI NI+ NCC + NCC- WCInv - WCInv- FCInv - FCInv+ Int*(1-t) + Net Borrowing
  35. 35. Interest rate 10% WCInv 0Tax rate 25% FCInv 0Total capital  400  Capital Debt  ‐ Structure Equity  400 EBITDA  300  D&A  50 EBIT  250  Income Interest ‐ StatementEBT  250  T  63 NI  188 FCFF  238  FCFFCFE  238 
  36. 36. InvestmentReturn=238/400=59.5%
  37. 37. 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 
  38. 38. FCFF IgnoresCapital Structure
  39. 39. Capital StructureMatters toFCFE
  40. 40. FCFF= NI+- NCC WCInv CFO- FCInv+ Int*(1-t) US GAAP
  41. 41. FCFF= NI+- NCC WCInv CFO- FCInv+ Int*(1-t) EBIT
  42. 42. FCFF= NI+- NCC WCInv CFO- FCInv+ Int*(1-t) EBIT EBITDA
  43. 43. FCFE= NICFO + - NCC WCInv - FCInv + Net BorrowingEBITEBITDA
  44. 44. Valuation
  45. 45. Sell
  46. 46. Equity value= Firm Value - MV of Debt
  47. 47. Firm value ∞ FCFFt=∑ t =1 ( + WACC) t 1 Equity value ∞ FCFEt =∑ t t =1 ( + r ) 1
  48. 48. WACC MV(Debt)= rd × (1 - T ) MV(Debt) + MV(Equity) MV(Equtiy)+ r MV(Debt) + MV(Equity)
  49. 49. Firm value FCFF 1= WACC - g FCFF0 (1 + g) Equity value= WACC - g FCFE1 = r-g FCFE0 (1 + g) = r-g
  50. 50. Interest rate 10% WCINv 0Tax rate 25% FCInv 0Re 15%g 5%Total capital 400 400 400Debt - 200 400Equity 400 200 -FCFF 238 238 238FCFE 238 223 208WACC 15% 11% 8%Firm value 2,494 3,990 9,975Equity value 2,494 2,336 2,179
  51. 51. InvestmentReturn=(2494-400)/400=523.5%
  52. 52. Two-StageFirm value Equity value n FCFF n FCFEt=∑ t =∑ t =1 (1 + WACC)t t =1 (1 + r )t FCFF +1 n 1 FCFEn+1 1+ + (WACC - g) (1 + WACC)n r - g (1 + r )n
  53. 53. ForecastingFCFE FCFE= NI = NI- (FCInv - Dep) - (1 - DebtRatio)(FCInv - Dep)- WCInv - (1 - DebtRatio)(WCInv )+ Net borrowing FCInv - Dep WCInv =Α =Β ∆ Sales ∆ Sales
  54. 54. FCFVS.DDM
  55. 55. YOU=Owner
  56. 56. Recap
  57. 57. 1. FCF
  58. 58. 2. FCFF
  59. 59. 3. FCFE
  60. 60. Remember
  61. 61. Solve
  62. 62. Thank You! liyati@sina.cn

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