Corporate

Finance Professional Certificate MOOC

Course 2, The Free Cash Flow Method for Firm Valuation
Module 2 Notes, The Free Cash Flows (FCFs)

Free Cash Flows (FCF) Computing change in netPPE
The cash flows generated by the firm’s ∆"#$%%& = "#$%%&( − "#$%%&(*+
operations after all required investments are -or-
funded. They are “free” in that they are available ∆"#$%%& = ,-.#/ − 0#.1#23-$34"
to be paid to debt and equity holders.
t = time period
Capex = Capital Expenditures
Free Cash Flows Formula Net Operating Working Capital (NOWC)
5,5 = 67% − ∆"#$%%& − ∆678, 678, = 7,9 − 7,:

NOP = Net Operating Profit NOWC = Net Operating Working Capital
netPPE = Net Property, Plant, and Equipment OCA = Operating Current Assets
NOWC = Net Operating Working Capital OCL = Operating Current Liabilities

Net Operating Profit (NOP) -or- Operating Current Assets (examples)
Net Operating Profit After Tax (NOPAT) - Accounts Receivables
- Inventories
- Pre-paid expenses
The profits available for equity and the holders Not Operating Current Assets (examples)
after taxes are taken away, but before - Cash
- Marketable Securities
investment is taken into account.
- Can be computed as EBIT - taxes on EBIT.
- Interest is not subtracted from NOP
Do not include non-operating income
Earnings Before Interest and Taxes (EBIT) & Operating Current Liabilites (examples)
Computing Taxes on EBIT - Accounts Payable
5,5′< >-/#< = $ ∗ &@A> - Accrued Expenses
- Accrued Wages
t = tax rate - Deferred Revenues
EBIT = Earnings Before Interest and Taxes Not an Operating Current Liability (examples)
- FCF = Free Cash Flows - Short-Term Debt
-
Computing True Taxes

>1B# >-/#< = $ ∗ (&@A> − 3"$#1#<$)

t = tax rate
EBIT = Earnings Before Interest and Taxes
Interest Tax Shield
A"$#1#<$ >-/ Eℎ3#GH = $ ∗ 3"$#1#<$
t = tax rate
netPPE
The Net Property, Plant, and Equipment.