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FCFE

The document discusses various valuation methodologies including relative valuation, asset based valuation, and discounted cash flow analysis. It provides details on discounted cash flow analysis, noting that it involves projecting cash flows over 4-6 years and discounting them using the weighted average cost of capital or cost of equity. Key steps include analyzing company performance, developing financial projections, calculating free cash flows to the firm or equity holders, estimating a terminal value, and deriving an enterprise or equity value.

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Shreya Shah
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189 views

FCFE

The document discusses various valuation methodologies including relative valuation, asset based valuation, and discounted cash flow analysis. It provides details on discounted cash flow analysis, noting that it involves projecting cash flows over 4-6 years and discounting them using the weighted average cost of capital or cost of equity. Key steps include analyzing company performance, developing financial projections, calculating free cash flows to the firm or equity holders, estimating a terminal value, and deriving an enterprise or equity value.

Uploaded by

Shreya Shah
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Valuation methodologies

Relative valuation Asset based valuation Discounted Cash Flow

It is the present value of future cash flows discounted at a specific risk adjusted rate It is the value derived from future earnings It can also be applied to companies with negative earnings/net worth

Projected cash flows generally 4-6 years


1. Free cash flows to firm (FCFF) 2. Free cash flows to equity holders (FCFE)

Discount rate
1. Weighted average cost of capital (WACC) 2. Cost of equity in case of FCFE.

Current & targeted capital structure Market view of business risk Terminal growth rate

Analyse - company performance Determine - what to value Develop - financial projections Calculate - FCFF & WACC / FCFE & cost of equity Primary value - sum of discounted free cash Estimate & calculate terminal growth rate & terminal value Derive - Enterprise or Equity value

FCFF (Free cash flow to the firm) FCFE (Free cash flow to equity)

Cash available to stockholders after payments to and inflows from bondholders. It is the cash flow from operations net of capital expenditures and debt payments (including both interest and repayment of principal). FCFE

Operating cash flows Less: Investments in fixed capital Add: New debt borrowing Less: Debt repayment Free cash flow to equity

Wide applicability for different dividend and financing policies. Free cash flow always reflects the capital that can potentially be paid out to shareholders, notwithstanding the dividend policy. This model is preferable to DDM models, when actual dividends differ significantly from FCFE. In contrast to dividends, a record of free cash flows is observable for any company. Since FCF model is based on the capital exceeding operational needs, it is useful for valuation of control ownership that allows investors to redeploy this capital. Disadvantages: If FCF < 0 due to capital demands. Many companies have negative free cash flow for years due to large capital demands. Since prediction of free cash flow far in the future would be imprecise, FCF model cannot be used for growth companies.

FCFE = Net income + non cash charges (income) capital expenditure + net borrowings

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