Free Cashflow Valuation

Why operating assets rather than total assets?

Assets which are involved in core business are more important rather than total assets as
company’s future revenues are based on it.

Why ROIC, NOPAT rather than Net Income?

Because they are better measure of profitability as they eliminate the effect of capital structure
and ROIC also compares company’s return with investor’s return.

Why cash flows and not net income?

Liquidity is more important than profitability as without profitability company’s can continue to
exist while without liquidity they possibly cannot exist.

DCF
The formula for DCF is:

DCF = CF11/1+r + CF22/1+r …..

where:
CF=The cash flow for the given year.
CF1 is for year one, 
CF2 is for year two,CFn is for additional years
r =The discount rate

Why free cashflow valuation and not DDM?

DDM can be used when a company gives dividend but if company is not giving dividends then
stock valuation can only be done through free cash flow method. (page 79)

Introduction to Free Cash Flow