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x Paid FCFF

Free Cash flow to Firm (FCFF) = EBIT(1-T) + D&A - Change in NonCash WC - CAPEX The easiest way to think of FCFF is ( EBITDA - Taxes from Ops - Chg in WC - Capex ). The FCFF represents the cash flows available to ALL investors after mandatory cash outflows for business needs have been taken out (including taxes).

TV = FCFn(1+g)/(r-g) Method 1 TV = FCFn*EV/EBITDA ratio Method 2 FCF discounted = EV Equity Value = Market Cap = EV Net Financial Debt Minority Interest Cash Flow Statement Net Income (from Income Statement) + D&A - Change in WC (Inventory + Receivables Payables) CFO - CapEx + Asset Sale Proceeds + Non-Cash Minority Interest - Increase in LT Investments CFI - Dividends + Borrowings + Equity Issuance CFF NET CHANGE IN CASH

Valuation You need to know the 3 main methodologies: 1. Comparable Company Analysis Look at publicly traded companies and the multiples they trade at, and then apply those to the company in question. 2. Precedent Transaction Analysis Look at what buyers paid for sellers in similar industries and with similar financial profiles and apply the multiples to your own company. 3. Discounted Cash Flow Analysis (DCF) Use a companys projected cash flows, discounting them for the time-value of money and cost of capital, and sum those with the companys discounted terminal value to find its present value. Know those and the various trade-offs among them (e.g. a DCF tends to be more variable than the others because there are so many assumptions). Maximum debt = 1-2 EBITDA (extremely conservative estimate)

Debt claims are senior to equity claims. Interest payments on debt claims are tax deductible, but dividends on equity claims are not.

In isolation, multiples tell very little. Good when compared to industry benchmark, or between similar companies. Ebitda multiple - Not affected by capital structure and tax effects, D&A - Allows fair comparison of cos with different capital sructure P/E and P/B are the multiples that are used to value financial services companies like banks since they have little to no "capital structure" related debt and interest expense is an normal operating expense. A is valued at 9x, B at 11x. Why? Risk, Earnings growth, profitability (profit margin), B has just built a factory and A is using an old one.

The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. The WACC is the minimum return that a company must earn on an existing asset base to satisfy its creditors, owners, and other providers of capital, or they will invest elsewhere. Companies raise money from a number of sources: common equity, preferred stock, straight debt, convertible debt, exchangeable debt, warrants, options, pension liabilities,executive stock options, governmental subsidies, and so on. Different securities, which represent different sources of finance, are expected to generate different returns. The WACC is calculated taking into account the relative weights of each component of the capital structure. The more complex the company's capital structure, the more laborious it is to calculate the WACC. Companies can use WACC to see if the investment projects available to them are worthwhile to undertake. [1]

Contents

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1 Calculation

Calculation [edit]

In general, the WACC can be calculated with the following formula: [2]

where and

is the number of sources of capital (securities, types of liabilities); is the market value of all outstanding securities .

In the case where the company is financed with only equity and debt, the average cost of capital is computed as follows:

where D is the total debt, E is the total shareholders equity, Ke is the cost of equity, and Kd is th e cost of debt. [3]

Tax effects can be incorporated into this formula. For example, the WACC for a company financed by one type of shares with the total market value of and cost of equity and one type of bonds with the total market value of a country with corporate tax rate , is calculated as: and cost of debt , in

Actually carrying out this calculation has a problem. There are many plausible proxies for each element. As a result, a fairly wide range of values for the WACC for a given firm in a given year, may appear defensible. [4]

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