1. Free Cash Flow
Valuation

2. Definition

3. Alternative
Bond Investments
Equity

4. Alternative
Bond Investments
Equity

5. Equity
Valuation

6. Absolute Relative
Equity
Valuation

7. Absolute Relative
Equity
Discounted
Cash
Flow Valuation

8. Absolute Relative
1. DDMEquity
2. FCF
Valuation
3. Residual
Income

9. 1. DDMEquity
2. FCF
Valuation
3. Residual
Income

10. Free
Cash
Flow

11. Free
Cash
Flow

12. Free
Cash to
Flow
Distribute

13. Free
to
Distribute
To Whom?

14. Capital Providers

15. Capital Providers
Lenders
Equity Investors
Preferred Shareholders

16. Capital Providers
Lenders
Equity Investors
Preferred Shareholders

17. Capital Providers
Lenders
Equity Investors
Preferred Shareholders

18. FCFF
FCFE

19. FCFF
FCF to the Firm
FCFE

20. FCFF
FCF to the Firm
FCFE
FCF to Equity

21. $4,000,000

23. Calculation

24. FCFF=
NI Net Income
+ NCC Non-Cash Charge
- WCInv Working Capital Inv.
- FCInv Fixed Capital Inv.
+ Int*(1-t) After-tax interest

25. FCFF=
NI Net Income
+ NCC Non-Cash Charge
- WCInv Working Capital Inv.
- FCInv Fixed Capital Inv.
+ Int*(1-t) After-tax interest

26. NCC ≈ D&A

27. FCFF=
NI Net Income
+ NCC Non-Cash Charge
- WCInv Working Capital Inv.
- FCInv Fixed Capital Inv.
+ Int*(1-t) After-tax interest

28. FCFF=
NI Net Income
+ NCC Non-Cash Charge
- WCInv Working Capital Inv.
- FCInv
+ Int*(1-t)
Current Asset Current Liability
WCInv=(CA1-CA0)-(CL1-CL0)

29. FCFF=
NI Net Income
+ NCC Non-Cash Charge
- WCInv Working Capital Inv.
- FCInv
+ Int*(1-t)
Cash and Cash Equivalents
Current Asset Current Liability
WCInv=(CA1-CA0)-(CL1-CL0)

30. FCFF=
NI Net Income
+ NCC Non-Cash Charge
- WCInv Working Capital Inv.
- FCInv
+ Int*(1-t)
Cash and Cash Equivalents
Current Asset Current Liability
WCInv=(CA1-CA0)-(CL1-CL0)

31. FCFF=
NI Net Income
+ NCC Non-Cash Charge
- WCInv Working Capital Inv.
- FCInv Fixed Capital Inv.
+ Int*(1-t) After-tax interest

32. FCFF=
NI Net Income
+ NCC Non-Cash Charge
- WCInv Working Capital Inv.
- FCInv Fixed Capital Inv.
+ Int*(1-t) After-tax interest

33. Interest rate 10%
Tax rate 25%
Total capital 400 400 400
Debt ‐ 200 400
Equity 400 200 ‐
EBIT 250 250 250
Interest ‐ 20 40
EBT 250 230 210
T 63 58 53
NI 188 173 158

34. FCFF= FCFE=
NI NI
+ NCC + NCC
- WCInv - WCInv
- FCInv - FCInv
+ Int*(1-t) + Net Borrowing

35. FCFF= FCFE=
NI NI
+ NCC + NCC
- WCInv - WCInv
- FCInv - FCInv
+ Int*(1-t) + Net Borrowing

36. Interest rate 10% WCInv 0
Tax rate 25% FCInv 0
Total capital 400
Capital
Debt ‐
Structure
Equity 400
EBITDA 300
D&A 50
EBIT 250
Income
Interest ‐
Statement
EBT 250
T 63
NI 188
FCFF 238
FCF
FCFE 238

37. Investment
Return
=238/400
=59.5%

38. Interest rate 10% WCInv 0
Tax rate 25% FCInv 0
Total capital 400 400 400
Debt ‐ 200 400
Equity 400 200 ‐
EBITDA 300 300 300
D&A 50 50 50
EBIT 250 250 250
Interest ‐ 20 40
EBT 250 230 210
T 63 58 53
NI 188 173 158
FCFF 238 238 238
FCFE 238 223 208

39. FCFF Ignores
Capital Structure

40. Capital Structure
Matters to
FCFE

41. FCFF=
NI
+
-
NCC
WCInv
CFO
- FCInv
+ Int*(1-t)
US GAAP

42. FCFF=
NI
+
-
NCC
WCInv
CFO
- FCInv
+ Int*(1-t)
EBIT

43. FCFF=
NI
+
-
NCC
WCInv
CFO
- FCInv
+ Int*(1-t)
EBIT
EBITDA

44. FCFE=
NI
CFO +
-
NCC
WCInv
- FCInv
+ Net Borrowing
EBIT
EBITDA

45. Valuation

46. Sell

48. Equity value
= Firm Value - MV of Debt

49. Firm value
∞
FCFFt
=∑
t =1 ( + WACC)
t
1
Equity value
∞
FCFEt
=∑ t
t =1 ( + r )
1

50. WACC
MV(Debt)
= rd × (1 - T )
MV(Debt) + MV(Equity)
MV(Equtiy)
+ r
MV(Debt) + MV(Equity)

51. Firm value
FCFF 1
=
WACC - g
FCFF0 (1 + g) Equity value
=
WACC - g FCFE1
=
r-g
FCFE0 (1 + g)
=
r-g

52. Interest rate 10% WCINv 0
Tax rate 25% FCInv 0
Re 15%
g 5%
Total capital 400 400 400
Debt - 200 400
Equity 400 200 -
FCFF 238 238 238
FCFE 238 223 208
WACC 15% 11% 8%
Firm value 2,494 3,990 9,975
Equity value 2,494 2,336 2,179

53. Investment
Return
=(2494-400)/400
=523.5%

54. Two-Stage
Firm value Equity value
n
FCFF n
FCFEt
=∑ t
=∑
t =1 (1 + WACC)t t =1 (1 + r )t
FCFF +1
n 1 FCFEn+1 1
+ +
(WACC - g) (1 + WACC)n r - g (1 + r )n

55. Forecasting
FCFE FCFE
= NI = NI
- (FCInv - Dep) - (1 - DebtRatio)(FCInv - Dep)
- WCInv - (1 - DebtRatio)(WCInv )
+ Net borrowing
FCInv - Dep WCInv
=Α =Β
∆ Sales ∆ Sales

56. FCF
VS.
DDM

57. YOU=Owner

58. Recap

59. 1. FCF

60. 2. FCFF

61. 3. FCFE

62. Remember

63. Solve

64. Thank You!
liyati@sina.cn