CHAPTER 5 – DISCOUNTED CASH FLOES Net Income Available to Common Shareholders

METHOD – the amount left for the common shareholders

Discounted Cash Flows (DCF) – is a valuation method
used to estimate the value of an investment based on its
expected future cash flows.
- Analysis can be done by determining the present
value of the net cash flows of the investment
opportunity.
Net Cash Flows – refer to the cash available for
distribution to both debt and equity claims of the business
or asset.
BASIS OF VALUATION CONDITIONS ARE
PRESENTED:
 Company does not pay dividends.
 Company pays dividends but the amount paid out
significantly differs form its capacity to pay
dividends.
 Net cash flows and profits are aligned within a
reasonable forecast period.
 Investor has a control perspective. If an investor
can exert control over a company, dividends can be
adjusted based on the decision of the controlling
investor.
There are two levels of Net Cash Flows:
 Net Cash Flows to the firm; and
 Net Cash Flows to equity
NET CASH FLOWS TO THE FIRM
-refers to the cash flow available top the parties who
supplied capital after paying all operating expenses,
includes taxes, and investing capital expenditures and
working capital as required by business needs.
-it is a cash flows generated from operating activities of the
business which intended to pay required return of fund
providers.
Enterprise Value of a Company – refers to the theoretical
value of its core business activities as reflected by its net
cash flows.
after deducting all costs, expenses, depreciation,
amortization, interest, taxes, and dividends to
preferred shareholders.
Non-Cash Charges (Net) – pertains to non-cash
items that are included in the computation of net
income.
Depreciation and Amortization – it is a non-cash
expenses and a two methods of calculating the
value for business assets over time.
Restructuring charges – refers to the change in
the organizational structure or business model of a
company adapt to changing economic climate or
business needs.
Provision for Doubtful Accounts – these are
estimated amount to incurred for the customers’
inability to pay on time which is cummulatively
accounted under the statement of financial position
reported against the accounts receivables.
After-Tax Interest Expense (net of any tax
savings) – it is a cash flow intended for the debt
providers.
Working Capital Adjustment – also known as
working capital. It represents the net investment in
current assets such as receivables and inventory
reduced by current liabilities like payable.
Investment in Fixed Capital – pertains to cash
outflows made to purchase or pay for capital
expenditures that are required to support existing
and future operating needs.

Cash Flows from Operating Activities – represents how

much cash the company generated from its operations.
Cash Flows from Investing Activities – represents how
much cash is distributed (received) for investment in (sale
of) long term assets like property, plant and equipment and
strategic investments in other companies.
Cash Flow from Financing Activities – represents how
much cash was raised (or repaid) to finance the company.

2. Corporate Disclosures – provides more

context for the future plans and strategies of
the company and a key in developing financial
Net Cash Flows to the Firm Php XXX
models. This will enable the analysts or the
TERMINAL VALUE – represents the value of the financial modelers to identify the risks about
company in perpetuity or in a going concern environment. the GCBO and quantify accordingly.
In practice, there are several ways on how to determine the 3. Contracts - it serves as formal agreement
terminal value. between parties. In valuing the GCMO’s, it is
important for the modeler to also know the
BASIS OF TERMINAL VALUE existing contracts and covenants contained in
1. Liquidation Value – some analysis finds that the it. Due diligence is necessary to verify any
terminal value be based on the estimated salvage contingent liability and other legal risks
value of the assets. surrounding that opportunity and quantify it
2. Estimated Perpetual Value – another way to accordingly to have a more conservative value.
determine the terminal value is by using the
farthest cash flows you can estimate divided by the
cost of capital less the growth rate.
3. Constant Growth – challenges for some valuators
is to determine the amount of required return for a
specific type of asset or investment.
4. Scientific Estimates – other valuators especially
those with vast experience already in some types
of investments uses other basis for them to
determine the reasonable terminal value.
DCF Analysis is most applicable to use when the ff. is
available:

 Validated operational and financial information.

 Reasonable appropriated cost of capital or required
rate of return.
 New quantifiable information.

I. Financial Models in Discounted Cash Flow

Analysis.

a. Historical Information and references

1. Audited Financial Statements – it is the most
ideal reference for the historical performance
of the company. It enabled the analysts or the
modelers to assess the future of the company
based on its past performance.