Seminar 7

Question 1

When should FCFF model be used?

Answer 1

1. Firm is not paying dividends
2. Dividends paid not constant
3. Dividends paid differ significantly from firm’s ability to pay div
4. FCFF reasonably align with profitability of company
5. Investor takes a controlling perspective

Question 2

What rate should FCFF should be discounted using? + formula

Answer 2

WACC

= (MVdebt / (MVdebt + MVequity) x Kd x (1 - Tax %) + (MVequity / (MVdebt + MVequity) x Ke

Question 3

Formula for intrinsic value per share using EV

Answer 3

P = Vequity / # of outstanding shares

Question 4

FCFF v FCFE

Answer 4

FCFF: FCF avail to all suppliers of capital = FCF avail after deducting operating expenses and taxes
- discounted at WACC

FCFE: FCF avail to COMMON shareholders
- discounted at Ke

Question 5

Process of FCFF model

Answer 5

1. Define FCF analysis approach
2. Make adjustments to FS (non cash item)
3. Calculate FCFx as defined
4. Forecast FCF based of historical data and forecast of FCF components

Question 6

Cash flow adjustment for restructuring charge

Answer 6

Depends on the situation - add back if expense. Sometimes involve real cash outflow.

Question 7

Formula to derive FCFF from:

1) NI
2) EBIT
3) EBITDA
4) CFO

Answer 7

1) FCFF = NI + Dep + Int exp x (1 - Tax) - InvWC - InvFA
2) FCFF = EBIT x (1 - Tax) + Dep - InvWC - InvFA
3) FCFF = EBITDA x (1 - Tax) + (Dep x Tax) - InvWC - InvFA
4) FCFF = CFO + Int exp x (1 - Tax) - InvFA

Question 8

CFO formula

Answer 8

CFO = NI + Dep/NCA - ∆WC

Question 9

FCFE formula

• from FCFF
• NI
• OCF

Answer 9

FCFE = FCFF - Int x (1 - Tax) + Net borrowings
= NI + Dep - InvWC - InvFA + Net borrowings
= OCF - InvFA + Net borrowings

Question 10

Forecast FCFF/FCFE formula

Answer 10

FCFF = EBIT x (1 - Tax) - Capex - WC

FCFE = NI - incre(CapEx & WC) x (1 - DR), where DR is the target debt financing ratio
= NI - incr(WC + Capex) + Net Borrowings

Question 11

Debt ratio formula

Answer 11

Debt / Assets

Question 12

Single stage constant growth FCF valuation formulas

Answer 12

FCFF

1) FCFF1 = FCFF0 x (1 + g)
2) EV = [FCFF0 x (1 + g)] / (WACC - g)

FCFE

3) FCFE1 = FCFE0 x (1 + g)
2) Vequity = [FCFE x (1 + g)] / (WACC - g)

Question 13

2 stage FCFE model vuluation - how to calculate

- does FCFE growth rate pattern follow sales growth rate

Answer 13

• calculate normally, no formula
• FCFE growth does not follow sales growth rate as incre WC and Capex decrease sharply in the 1st year of the new (lower) growth rate – the rest of the years FCFE growth rate follow sales growth rate