Valuation is treating free cash flows of the firm as potential dividends.
Valuation Reminder
The intrinsic value of any asset is a function of the magnitude of expected cash flows over its lifetime and the uncertainty about receiving those cash flows
First step in Valuation
Project future cash flows
Is Net Income cash?
Is change in cash from Cash Flow Statement Cash?
Free cash flow to the firm (FCFF)
Also known as Unlevered Cash flow
Cash flow that an enterprise produces that is "free" to be used to service the securities (debt and equity) that a firm issues to finance its operations
Free of:
Any financing effect
Non-cash accounting charges and other accounting "quirks"
Defining FCFF
After-tax pre-depreciation operating profit (aka operating cash flows) minus investment
Investment
Change in net working capital
(CA- (Cash or Excess cash))-(CL- Current portion of LTD)
CAPEX
$FCFF=EBITDA*(1-T_C)+Depreciation*T_C-Investment$
$FCFF=EBIT*(1-T_C)+Depreciation-Investment$
Basic FCFF Calculation
Suppose a firm has revenue of $100M and operating expenses of $60M. The cash flow statement shows a value of $20M for D&A and $20M for capital expenditures. The marginal tax rate in the US is 21%. The below shows the balances in CA and CL. What is the unlevered cash flow for this firm?