...The article, Measuring Free Cash Flows For Equity Valuation: Pitfalls and Possible Solutions by Juliet Estridge and Barbara Lougee, provides a guide to cash flows definition that aims to helps inventors avoid common pitfalls while providing inside to corporate performance and value. This article looks at two different valuation methods along with corresponding studies and evidence. The article begins with the definition of value and “free cash flow”. Miller and Modigliani demonstrate that the value of the company is the present value of its future expected operating profits net of the new capital investment required to sustain the business. Using this basic analytical framework, M&M came up with two valuation approaches: discounted cash flow approach and investment opportunities approach. Joel Stern recognizes the term “free cash flow” as net operating profits after taxes minus the amount of new capital invested. However, accounting methodologies pose limits on valuations metrics: inconsistency, misclassification, ease of manipulation, and measurement errors. The article provides an example of the difference measures used for cash flow among various companies such as P&G, The Gap, and others. The first valuation method is multiples, which include only recurring or sustainable cash flows and excludes discretionary cash flows. The article shows an example of the price to free cash flow multiple (P/FCF) and “cash flow to yield” (FCFfY) as an increasingly popular valuation...
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...Free Cash Flow: Free, But Not Always Easy Read more: http://www.investopedia.com/articles/fundamental/03/091703.asp#ixzz1ufzEnLN5 March 08 2010 | Filed Under » Fundamental Analysis, Stock Analysis, Stocks The best things in life are free, and the same holds true for cash flow. Smart investors love companies that produce plenty of free cash flow (FCF). It signals a company's ability to pay debt, pay dividends, buy back stock and facilitate the growth of business - all important undertakings from an investor's perspective. However, while free cash flow is a great gauge of corporate health, it does have its limits and is not immune to accounting trickery. (For background reading, see Analyzing Cash Flow The Easy Way.) What Is Free Cash Flow? By establishing how much cash a company has after paying its bills for ongoing activities and growth, FCF is a measure that aims to cut through the arbitrariness and "guesstimations" involved in reported earnings. Regardless of whether a cash outlay is counted as an expense in the calculation of income or turned into an asset on the balance sheet, free cash flow tracks the money. To calculate FCF, make a beeline for the company's cash flow statement and balance sheet. There you will find the item cash flow from operations (also referred to as "operating cash"). From this number subtract estimated capital expenditure required for current operations: Cash Flow From Operations (Operating Cash) - Capital Expenditure --------------------------- ...
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...Ismail & Sanusi —An Empirical Analysis of Cash Flow and Investment Fluctuations ... Gadjah Mada International Journal of Business January-April 2005, Vol. 7, No. 1, pp. 95—107 AN EMPIRICAL ANALYSIS OF CASH FLOW AND INVESTMENT FLUCTUATIONS USING FIRM-LEVEL PANEL DATA* Abd. Ghafar Ismail Nur Azura Sanusi Since the pioneering work of Gurley and Shaw (1955), the attempt has been done to justify money as a primary focal point of macroeconomic theorizing. However, other researchers argue that variables such as financial development and indicators are also important to be linked with macroeconomic performance. Here, if money can be thought as means of production and consumer goods as the ultimate end toward which production is directed, and then capital also occupies a position that is both logically and temporarily intermediate between original means and ultimate ends. This temporarily intermediate status of capital is not in serious dispute, but its significance for macroeconomic theorizing is rarely recognized. The firms’ decision to acquire funds through debt and equity financings affects the capital structure, and, in the firm’s balance sheet, the impact of capital appears to influence the inventory investment. Hence, the significance of capital structure –induced inventory distortions in the context of firm-level is the basis for our article. The sample for our analysis is compiled from the balance sheets of listed syaria firms in the Kuala Lumpur Stock Exchange for the period...
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...financing for Netscape? 5. What are the advantages and disadvantages of having an IPO? 6. What should be the offering price for Netscape’s stock ($28, the original $14, or something else)? Why? Value Netscape with the discounted free-cash-flow methodology under three different scenarios (see second page). Assume there will be 38 million shares of Netscape stock outstanding after the IPO. Estimated Value of Netscape – Scenarios 1-3 (1995 is actual value, 1996-2005 are forecasts) all dollar and share amounts in thousands 1995 1996 1997 1998 FCF -11,375 -13,260 -13,769 -10,809 Terminal Value 1999 -406 2000 13,654 2001 36,471 Now suppose we are confident in our estimated free cash flows from 1996-2001. What is the estimated market value of Netscape under these three scenarios? Assume incur loss of -11,375 immediately, -13,260 in one year, etc. SCENARIO 1 Assumptions: Discount rate is 12%. Growth rate from 2001-2005 is approximately 55% per year. Growth rate after 2005 is 4% every year, thus free-cash flow in 2006 will be (free-cash flow in 2005 * 1.04). SCENARIO 2 Assumptions: Discount rate is 12%. Growth rate from 2001-2005 is approximately 30% per year. Growth rate after 2005 is 4% every year, thus free-cash...
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...Sasha Fedkevich Ch. 1 Mini Case Study a) Corporate finance is important to all managers because they need to understand the value of doing business in a corporate world. From marketing to operations, managers must be able to identify only those projects which will bring value to the investors. b) Organizational forms a company might take on as it evolves are: a. Proprietorship i. Advantages: 1. Ease of formation 2. Subject to few regulations 3. No corporate income taxes ii. Disadvantages: 1. Limited life 2. Unlimited liability 3. Difficult to raise capital to support growth b. Partnership i. Advantages 1. Similar to proprietorship ii. Disadvantages 1. Similar to proprietorship c. Corporation i. Advantages: 1. Unlimited life 2. Easy transfer of ownership 3. Limited liability 4. Ease of raising capital ii. Disadvantages: 1. Double taxation 2. Cost of set-up and report filing c) Corporations go public and continue to grow by issuing an IPO and by borrowing from banks, issuing debt, or selling additional shares of stock. Agency problems are the differences between the goals of managers and shareholders where managers sometimes act in their self interest when they act as the agent of the corporation. Corporate governance is a set of rules that control the company’s behavior towards its managers, employees, shareholders. d)...
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...enough to justify the investments. The inventory rose from $715,200 to $1,287,360 and accounts receivable almost doubled increasing to $632,160 in 2015 from 2014’s $351,200. What effect did it have on the liabilities and equity? The financing needed for the expansion caused the current liabilities to increase from $481,600 to $1,328,960. Long term debt increased to help with financing but no new stocks were issued b. What do you conclude from the statement of cash flows? This statement of cash flows shows the impact of buying and selling fixed assets, cash transactions with shareholders, and the borrowing and repaying lenders to pay for the expansion. Although sales nearly doubled, it still was not enough to cover all of the money borrowed and justifies the rule to only buy assets that one can fund. The net cash flow from operations is down ($503,936) due to the lack of collection of cash from accounts receivables and the increase of cash used to purchase an abundance of inventory for the expansion. The net cash from investing activities is down (683,350) from heavily investing in...
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...the unlevered free cash flows of the investment. * Compute the weighted average cost of capital with the following formula: * Compute the value with leverage, VL, by discounting the free cash flows of the investment using the WACC. APV (Adjusted Present Value) – This method involves determining the value of a levered investment using the following steps: * Determine the investment’s value without leverage, VU, by discounting its free cash flows at the unlevered cost of capital, rU: * Determine the present value of the interest tax shield. * Given debt D, on date t, the tax shield on date t + 1 is tc x rD x Dt. * If the debt level varies with the investment’s value or free cash flow, use discount rate rU. (If the debt is predetermined, discount the tax shield at rate Dt. * Add the unlevered value VU to the present value of the interest tax shield to determine the value of the investment with leverage, VL. The APV Formula: b) The cash flows for 2008 through 2012 should be valued like this: Service revenue Plus: Equipment sales Total Revenue Less: System Operating Expenses Less: Cost of Equipment Sold Less: Selling, General & Administrative EBITDA Depreciation & Amortization EBIT ------------------------------------------------- Income Tax at 40% Unlevered Net Income Plus: Depreciation & Amortization Less: Capital Expenditures Less: Increase in Net Working Capital Unlevered Free Cash Flow c) The terminal...
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...1. Do you think Mercury is an appropriate target for AGI? Why or why not? Mercury is an appropriate target for AGI. AGI is looking to increase its revenue and profit by utilizing synergies. The initial aim of AGI for acquiring Mercury Athletics is to increase leverage with contract manufacturers and to boost the cooperation with the retailers and distributors. AGI was one of the most profitable and successful companies in the market segment, but the firm’s size re mained rather small in comparison with the main competitors. Therefore, with the acquisition of Mercury, AGI planned to build competitive advantage. Besides, the target company had well developed operation infrastructure, impressive labor facilities in China and numerous possibilities in reaching the markets in Asia. 2. Review Liedtke’s projections stated in the case. Are they reasonable? How would you rec ommend modifying them? [Hint: Calculate ratios and margins for the projections and compare these to the historical relationships.] Mercury’s EBIT margin for 2006 was 9.8%. Liendke’s 2007 projected EBIT reflects a conser vative increase in EBIT of 9% compared to the average industry growth rate of 10%. According to the forecast for 2007 to 2011, the company is forecasted to show gradual and stable growth of consolidated income from $479.3 million to $597.7 million. This growth rate was estimated by assuming that men’s athletic department sales will be declining from 15% in 2007 to 5% in 2011. Similar trends...
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...CHAPTER 11 CORPORATE VALUATION AND VALUE-BASED MANAGEMENT (Difficulty: E = Easy, M = Medium, and T = Tough) True/False Easy: (11.1) Corporate valuation model Answer: b Diff: E 1 . The corporate valuation model cannot be used unless a company doesn’t pay dividends. a. True b. False (11.2) Free cash flows and valuation Answer: a Diff: E 2 . Free cash flows should be discounted at the firm’s weighted average cost of capital to find the value of its operations. a. True b. False (11.3) Value-based management Answer: b Diff: E 3 . Value-based management focuses on sales growth, profitability, capital requirements, the weighted average cost of capital, and the dividend growth rate. a. True b. False (11.5) Corporate governance Answer: b Diff: E 4 . Two important issues in corporate governance are (1) the rules that cover the board’s ability to fire the CEO and (2)the rules that cover the CEO’s ability to remove members of the board. a. True b. False Medium: (11.3) Return on invested capital and MVA Answer: b Diff: M 5 . If a company’s expected return on invested capital is less than its cost of equity, then the company must also have a negative market value added (MVA). a. True b. False Chapter 11: Valuation and Value-Based Management Page 1 (11.5) Corporate governance Answer: b 6 . A poison pill is also known as a corporate restructuring. a. True b. False Diff: M (11.5) Stock options Answer: b Diff: M 7 . The CEO of D’Amico Motors has been granted some stock...
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...DUKE UNIVERSITY Fuqua School of Business FINANCE 251F/351 Individual Assignment #2 Sampa Video, Inc. Prof. Simon Gervais Spring 2010 – Term 1 In this case, you have to assess the viability of the home-delivery project that Sampa Video is considering. You are asked to do your analysis using WACC, and then using APV. In both cases, you can use the data in Exhibit 2 to calculate the unlevered free cash flows of the project. Assume that these unlevered free cash flows will grow at 5% per year in perpetuity following the year 2006; that is, if you calculate the unlevered free cash flow to be UFCF2006 in 2006, the unlevered free cash flow will be UFCF2006(1.05)t−2006 in year t = 2007, 2008, . . . When calculating the project’s value using WACC, assume that the target debt-to-value ratio of the project is 25%, and that the firm will borrow at a rate of 6.8%, as suggested in Exhibit 3. When calculating the project’s value using APV, assume that Sampa Video will initially borrow $1.5 million at a rate of 6.8% to start the project. However, assume that at the end of every year for the first five years, Sampa Video will repay $150,000 in principal (in addition to the interest on the outstanding loan) and reduce the value of the outstanding loan to $750,000 at the end of 2006. After that, assume that Sampa will keep the debt at that level (of $750,000 outstanding) in perpetuity. For your calculations with both WACC and APV, do your analysis with two different assump- ...
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...Week 1 H/W Chapters 1& 2 Mini Case (Pg. 45) A. Corporate finance is important to all managers because it helps the managers to determine what projects or expenditures will and will not add value to the firm. It will allow managers to pick only the projects what will add value to the firm. It also helps the managers determine what each project will cost the firm. The managers will look to see if they have capital for those projects. The managers will prepare the capital needed from a combination of its own capital and outside sources (savers) to fund the projects that will add value to the firm. B. A business progresses from the sole proprietorship to partnership to a corporation ultimately. The advantages of a sole proprietorship are it is easy to start the business, requires less start-up funding, there are few governmental regulations imposed on in, and corporate taxes are not imposed. The disadvantages are it would be difficult for the business to obtain outside capital because it would be depended upon the credit worthy of the owners, the owners are 100% liable for the business, and the life of the business is depended on how long can the owners keep the business or as long as the owners are still alive. The advantages of a partnership are it is low cost as well, starting a partnership is easy, and there is a combined knowledge and resources put into the business. The disadvantages of partnership are the owners are liable for the business ad for the actions of their...
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...1 FINAL EXAM FINC 5000 Instructions: 1. Please write your name on your answer sheet. Show your detail works 2. The exam is individual work. It is to be your work and your work alone, with no assistance from classmates, family, friends or others. 3. Your completed exam is due on or before 10/09/12 (11:59 P.M). 4. By proceeding with the exam you are agreeing not to share the exam content or your answers with anyone, including students who may take FINC 5000 in the future GOOD LUCK +++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ 1. To help finance a major expansion, Bull Company sold a noncallable bond several years ago that now has 20 years to maturity. This bond has a 10% annual coupon, paid semiannually, sells at a price of $1,075, and has a par value of $1,000. If the firm's tax rate is 40%, what is the component cost of debt for use in the WACC calculation? 2. Assume that Kelly Inc. hired you as a consultant to help estimate its cost of common equity. You have obtained the following data: D0 = $0.80; P0 = $27.50; and g = 7.00% (constant). Based on the DCF approach, what is the cost of common from retained earnings? 3. You were recently hired by TOM TOM Inc. to estimate its cost of common equity. You obtained the following data: D1 = $1.75; P0 = $42.50; g = 8.00% (constant); and F = 5.00%. What is the cost of equity raised by selling new common stock? 4. Tomboy plans to issue a $1,000 par value, 20-year noncallable bond with a 8.00% annual...
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...used both for companies that pay dividends and those that do not pay dividends. b) The corporate valuation model discounts free cash flows by the required return on equity. c) The corporate valuation model can be used to find the value of a division. d) An important step in applying the corporate valuation model is forecasting the firm's pro forma financial statements. e) Free cash flows are assumed to grow at a constant rate beyond a specified date in order to find the horizon, or terminal, value. Correct Answer is b) 2. (TCO F) Which of the following statements is correct? (Points : 5) a) For a project with normal cash flows, any change in the WACC will change both the NPV and the IRR. b) To find the MIRR, we first compound cash flows at the regular IRR to find the TV, and then we discount the TV at the WACC to find the PV. c) The NPV and IRR methods both assume that cash flows can be reinvested at the WACC. However, the MIRR method assumes reinvestment at the MIRR itself. d) If two projects have the same cost, and if their NPV profiles cross in the upper right quadrant, then the project with the higher IRR probably has more of its cash flows coming in the later years. e) If two projects have the same cost, and if their NPV profiles cross in the upper right quadrant, then the project with the lower IRR probably has more of its cash flows coming in the later years. Correct Answer is e) 3. (TCO D) The Ramirez Company's last dividend was $1.75. Its dividend...
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...Due Date : Wed, 01-02-2012 Ratios to be Calculated * Net Operating Working Capital * Total Working Capital * Net Operating Profit after Taxes * Free Cash Flows * Market Value Added Net Operating Working Capital = Current Assets – Current Liabilities Rupee (000) | 2011 | 2010 | 2009 | Current Assets | 3262718 | 1779477 | 2143328 | Current Liabilities | (3731902) | (2128504) | (2343211) | Net Operating Working Capital | 6994620 | 3907981 | 4486539 | Total Working Capital = Net Operating Working Capital + Operating Long Term Assets | 2011 | 2010 | 2009 | Net Operating Working Capital | 6994620 | 3907981 | 4486539 | Operating Long Term Assets | 7771887 | 8400165 | 7843424 | Total Working Capital | 14766507 | 12308146 | 12329963 | Net Operating Profit after Taxes =EBIT * ( 1 - Tax rate ) | 2011 | 2010 | 2009 | EBIT | 518229 | 609962 | 987894 | (1- Tax rate) | 1-0.35=0.65 | 0.65 | 0.65 | Net Operating Profit after Taxes | 336849 | 396475 | 642131 | Free Cash Flows = NOPAT – Net investments in operating Assets | 2011 | 2010 | 2009 | NOPAT | 336849 | 396475 | 642131 | Depreciation | 50432 | 435763 | 413417 | Change in Working Capital | 390829 | (578372) | (730257) | Capital Expenditure | 260046 | 283092 | 103263 | Free Cash Flows | (263594) | 1127518 | 222028 | Market Value Added = Market value of Stock at present day - Book Value of the Stock | 2011 | 2010 | 2009 | Market Value | 99.81 | 134...
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...1. Do you think Mercury is an appropriate target for AGI? Why or why not? Mercury is an appropriate target for AGI. AGI is looking to increase its revenue and profit by utilizing synergies. The initial aim of AGI for acquiring Mercury Athletics is to increase leverage with contract manufacturers and to boost the cooperation with the retailers and distributors. AGI was one of the most profitable and successful companies in the market segment, but the firm’s size remained rather small in comparison with the main competitors. Therefore, with the acquisition of Mercury, AGI planned to build competitive advantage. Besides, the target company had well developed operation infrastructure, impressive labor facilities in China and numerous possibilities in reaching the markets in Asia. 2. Review Liedtke’s projections stated in the case. Are they reasonable? How would you recommend modifying them? [Hint: Calculate ratios and margins for the projections and compare these to the historical relationships.] Mercury’s EBIT margin for 2006 was 9.8%. Liendke’s 2007 projected EBIT reflects a conservative increase in EBIT of 9% compared to the average industry growth rate of 10%. According to the forecast for 2007 to 2011, the company is forecasted to show gradual and stable growth of consolidated income from $479.3 million to $597.7 million. This growth rate was estimated by assuming that men’s athletic department sales will be declining from 15% in 2007 to 5% in 2011. Similar...
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