4/27/2017 Class Business Upcoming Case.

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Presentation transcript:

4/27/2017 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)

Free Cash Flows to Firm and 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

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

Growth Rates g = ROE*b FCFE Model gFCFE = NROE*ERR Dividend Model 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)