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Free Cash Flow Valuation: Presenter Venue Date
Free Cash Flow Valuation: Presenter Venue Date
VALUATION
Presenter
Venue
Date
Common stockholders
Common stockholders
Debtholders
Preferred stockholders
FCFE Discounted
at Required Equity
Return
FCFF Discounted
at WACC Debt
Value
FCFFt
Firm value
t
t 1 1 WACC
FCFEt
Equity value
t
t 1 1 r
FCFF1
Firm value
WACC g
Equity value Firm value Debt value
FCFE1
Equity value
rg
$6,000,000
0.25
$30,000,000
Shares outstanding
Required return on equity
2,900,000
12%
Cost of debt
7%
5%
Tax rate
30%
WACC
MV(Debt)
rd (1 Tax rate)
MV(Equity) MV(Debt)
MV(Equity)
r
MV(Equity) MV(Debt)
olders
Where Net payments to debtholders Int 1 Tax rate Debt repayments Debt issuances
Where Net payments to stockholders Cash dividends Share repurchases Stock issuances
$1,000
Depreciation expense
$400
Interest expense
$150
Tax rate
Purchases of fixed assets
30%
$500
$50
Net borrowing
$80
Common dividends
$200
expenditures
WCInv
$4,000
$200
$600
30%
$800
$700
$50
10%
40%
$800 $700
$200
$50
Incremental WC/Sales growth
25%
$200
50%
expenditures
FCFF $441 $100 $50 $291
WCInv
FCFFt
FCFFn 1
1
Firm value
+
t
n
WACC
(1
WACC)
1
WACC
t 1
Equity value
t =1
FCFE t
1 r
FCFE n 1
1
+
r g (1 r )n
$10
20%
5%
10%
FCInv/Sales growth
40%
WCInv/Sales growth
25%
30%
12%
t financing
FCFE $12.00 10% $2 40% $2 25% + $2 65% 30%
FCFE $1.20 $0.80 $0.50 $0.39
FCFE $0.29
20%
20%
20%
5%
5%
EPS
$1.200 $1.440
$1.728
$1.814 $1.905
$0.800 $0.960
$1.152
$0.346 $0.363
$0.500 $0.600
$0.720
$0.216 $0.227
$0.390 $0.468
$0.562
$0.168 $0.177
$0.290 $0.348
$0.418
$1.421 $1.492
Growth in FCFE
20.0%
20.0% 240.3%
5.0%
t =1
Equity value
FCFE t
1 r t
$0.29
1.12
FCFE n 1
1
r g (1 r )n
$0.348
1.12
$0.418
1.12
$1.421
1
DECLINING GROWTH
TWO-STAGE FCFE MODEL
Current EPS
WCInv/FCInv
Debt financing of FCInv and WCInv growth
Required return on equity
EPS and FCInv growth for Year 5
and thereafter
$1 .00
40%
30%
12%
5%
Year
1
EPS growth
30%
21%
13%
8%
5%
$1.50
$1.25
$1.00
$0.75
$0.50
financing
Year
1
EPS
t =1
Equity value
FCFEt
1 r
$0.17
FCFE n 1
1
r g (1 + r )n
$0.348
$0.797
$1.185
$1.526
1
0.12 0.05 (1.12)4
21.80
(1.12)
$15.30
$100 .00
300 .00
$400.00
30%
24%
12%
5%
10%
30%
30%
30%
24%
12%
5%
FCFF
$130.0
$169.0
$219.7
$272.4
$305.1
$320.4
PV of FCFF
$118.2
$139.7
$165.1
$186.1
$189.5
FCFFn 1
1
Terminal value
WACC g (1 WACC)n
$320.4
1
Terminal value
$3979
5
0.10 0.05 (1 0.10)
Note : The above formula shows the present value of perpetual stream at t = 0
t =1
FCFFt
1 WACC t
FCFFn 1
1
WACC g (1 WACC)n
SUMMARY
SUMMARY
SUMMARY
SUMMARY
Forecasting FCFF and FCFE
Forecast sales growth
Assume EBIT margin, FCInv, and WCInv are
proportional to sales
For FCFE, assume debt ratio is constant