1. 4/27/2017
Class Business
Upcoming Case

2. Free Cash Flows Free Cash Flows to the Firm (FCFF)
Cash flows available to debtholders, equity holders (common and preferred)
Free Cash Flows to Equity Holders
Cash flows available to equity holders (common and preferred)

3. Free Cash Flows to Firm and Valuation
Definition:
FCFF = EBIT(1-tax rate) – (Capital Expenditures – Depreciation) – (Change in working capital)
Valuation Steps:
Construct forecasts of FCFF
Obtain discount rate for cash flows (WACC)
Construct Value of Firm
Subtract off Market value of Debt

4. Free Cash Flows to Equity and Valuation
Definition:
FCFE = Net income – (Capital Expenditures – Depreciation) – (Change in working capital) (New Debt issued – Debt repayments) +
(New Preferred Issues – Preferred Dividends)
Valuation Steps:
Construct forecasts of FCFE
Obtain discount rate for cash flows (k) - CAPM
Construct Equity Value of Firm

5. Growth Rates g = ROE*b FCFE Model gFCFE = NROE*ERR Dividend Model
ERR = 1 – (Net Capital Expenditures + Change in Working Capital – Net Debt Issues)/Net Income
NROE = (Net Income – After-tax income from cash and marketable securities)/(Book value of equity – Cash and marketable securities)