18 - FIN 300 Fundamentals of Finance Project Cash Flows Chapter 11 FIN 300 Project Cash Flows 1 Cash Flow Example The following is given for a firm in a

18 - FIN 300 Fundamentals of Finance Project Cash Flows...

This preview shows page 1 - 6 out of 17 pages.

FIN 300 Fundamentals of Finance Project Cash Flows Chapter 11 1 FIN 300 - Project Cash Flows
Image of page 1
Cash Flow Example The following is given for a firm in a particular year: Sales (or, revenue) = $10M COGS (or, variable costs) = $2M S,G,&A (or, fixed costs) = $3M Depreciation Expense = $1.5M Interest Expense = $1M Firm incurs a tax rate = 40% In this year, the firm will acquire an additional $1M of net working capital In this year, the firm will invest $2.5M in new equipment (P,P, & E) What are the relevant cash flows used to value this firm? FIN 300 - Project Cash Flows 2
Image of page 2
Free Cash Flow Answer: The Free Cash Flow What is the free cash flow? The free cash flow is: Actual net cash flow generated by the firm’s operating assets Cash that is available (freed-up) for making payments to the suppliers of financing The “free cash flow” is the “pot” of money at the end of each period that is available to pay interest and principal on debt and pay dividends and re-purchase stock FIN 300 - Project Cash Flows 3
Image of page 3
(Asset) Free Cash Flow FIN 300 - Project Cash Flows 4 ASSETS DEBT EQUITY Market Value Balance Sheet Firm’s Operations Generate Cash Flow ( Operating CF ) Re-Investment in NWC & Fixed Assets of Firm (CAPEX) Debt Payments (Interest & Principal) Equity Flows: Dividends & Share Purchase Free Cash Flow
Image of page 4
Free Cash Flow & Value We use the free cash flow to value the assets of the firm The market value of the firm’s assets equals the discounted present value of the free cash flows
Image of page 5
Image of page 6

You've reached the end of your free preview.

Want to read all 17 pages?

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture