FIN 300 Fundamentals of Finance Project Cash Flows Chapter 11 1 FIN 300 - Project Cash Flows
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
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
(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
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 –
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