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Free Cash Flow To Firm Model

This document outlines the free cash flow to firm (FCFF) valuation model. It defines FCFF as net income plus depreciation minus capital expenditures and changes in net working capital plus interest expenses times one minus the tax rate. It provides an example calculation of FCFF for a firm over four years and uses the constant growth model to calculate the terminal value, which is then discounted at the weighted average cost of capital to determine the firm value. The value of debt is then subtracted from the firm value to calculate equity value, which is divided by shares outstanding to determine the stock price per share.

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199 views7 pages

Free Cash Flow To Firm Model

This document outlines the free cash flow to firm (FCFF) valuation model. It defines FCFF as net income plus depreciation minus capital expenditures and changes in net working capital plus interest expenses times one minus the tax rate. It provides an example calculation of FCFF for a firm over four years and uses the constant growth model to calculate the terminal value, which is then discounted at the weighted average cost of capital to determine the firm value. The value of debt is then subtracted from the firm value to calculate equity value, which is divided by shares outstanding to determine the stock price per share.

Uploaded by

ddengr
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Equity Valuation:

Free Cash Flow to Firm Model


http://www.tinyurl.com/BrackerFCFF

Introduction
FCFF = Net Income + Depreciation Capital
Expenditures Increase in NC Working Capital
+ Interest*(1 T)
FCFF = CF from Operating Activities + Interest * (1 T)
Capital Expenditures
FCFF is discounted at the WACC instead of the cost of
equity.
FCFF is used to get the value of the FIRM. To get the
value of the equity, you must subtract out the value of
debt.

Example
Assume you have forecasted the following for firm X:
Number of Shares Outstanding 400,000
Current Debt $5,000,000
Tax Rate 30%
WACC 9.75%
Year 1
Net Income $800,000
Depr.
$200,000
Cap. Exp.
$350,000
Inc. in NC
WC
-$50,000
Interest
$300,000

Year 2
$850,000
$250,000
$100,000

Year 3
$900,000
$225,000
$400,000

Year 4
$940,000
$275,000
$300,000

$100,000
$320,000

-$75,000
$330,000

$25,000
$350,000

Constant Growth Rate following Year 4 4%

Step 1: Forecast FCFF Values


FCFF1 = $800,000 + $200,000 - $350,000 (-$50,000)
+ $300,000*(1 0.3) = $910,000
FCFF2 = $850,000 + $250,000 - $100,000 $100,000
+ $320,000*(1 0.3) = $1,124,000
FCFF3 = $900,000 + $225,000 - $400,000 (-$75,000)
+ $330,000*(1 0.3) = $1,031,000
FCFF4 = $940,000 + $275,000 - $300,000 $25,000
+ $350,000*(1 0.3) = $1,135,000

Step 2: Solve for value of all FCFF in


Constant Growth Stage

V4 = $18,979,930

Step 3: Solve for Value of Firm


CF0 = 0
CF1 = 910,000
CF2 = 1,124,000

CF3 = 1,031,000
CF4 = 20,114,930
k = 9.75%

NPV = V0 = $16,406,609

Step 4: Convert to Value per Share


Value of Equity = $16,406,609 - $5,000,000
= $11,406,609
P0 = 11,406,609/400,000 = $28.52

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