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Class Business

Class Business. Upcoming Case. Free Cash Flows. Free Cash Flows to the Firm (FCFF) Cash flows available to debtholders, equity holders (common and preferred) Free Cash Flows to Equity Holders Cash flows available to equity holders (common and preferred).

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Class Business

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  1. Class Business • Upcoming Case

  2. Free Cash Flows • Free Cash Flows to the Firm (FCFF) • Cash flows available to debtholders, equity holders (common and preferred) • Free Cash Flows to Equity Holders • Cash flows available to equity holders (common and preferred)

  3. Free Cash Flows to Firmand Valuation • Definition: FCFF = EBIT(1-tax rate) – (Capital Expenditures – Depreciation) – (Change in working capital) • Valuation Steps: • Construct forecasts of FCFF • Obtain discount rate for cash flows (WACC) • Construct Value of Firm • Subtract off Market value of Debt

  4. Free Cash Flows to Equity and Valuation • Definition: FCFE = Net income – (Capital Expenditures – Depreciation) – (Change in working capital) + (New Debt issued – Debt repayments) + (New Preferred Issues – Preferred Dividends) • Valuation Steps: • Construct forecasts of FCFE • Obtain discount rate for cash flows (k) - CAPM • Construct Equity Value of Firm

  5. Growth Rates • Dividend Model • g = ROE*b • FCFE Model • gFCFE = NROE*ERR • ERR = 1 – (Net Capital Expenditures + Change in Working Capital – Net Debt Issues)/Net Income • NROE = (Net Income – After-tax income from cash and marketable securities)/(Book value of equity – Cash and marketable securities)

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