Firm Value - Firm Value Free cash flow (FCF) is defined as...

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Unformatted text preview: Firm Value Free cash flow (FCF) is defined as the cash flow available for distribution to investors (of any type) after the firm has made all the investments in fixed assets and working capital to maintain operations. That is, FCF is the cash from o perations a vailable for d istribution to d ebt holders, c ommon stockholders and preferred stockholders. FCF = Sales Revenue - Operating Costs and Taxes - Required Investments in Operations Uses of FCF (1) (2) (3) (4) (5) (6) (7) Buy back debt. Pay interest to debt holders. Buy back common stock. Pay common stock dividends. Buy back preferred stock. Pay preferred stock dividends. Invest in financial securities. Value of Operations = Vop = PV of expected future free cash flow (FCF) VF = FCF1 (1 + WACC)1 ∞ + FCF2 (1 + WACC)2 + …+ FCF∞ (1 + WACC)∞ = ∑ t=1 FCFt (1 + WACC)t The WACC depends on the chosen capital structure and the cost of the capital components. Recall that the chosen capital structure depends on the cost of each type of capital. The above equation indicates that maximizing firm value must coincide with minimizing the WACC. Value of operations = Vop = PV of expected future free cash flow (FCF) VF = FCF1 (1 + WACC)1 ∞ + FCF2 (1 + WACC)2 + …+ FCF∞ (1 + WACC)∞ = ∑ t=1 FCFt (1 + WACC)t Valuation Perspectives Dollars (Millions) Nonoperating Assets = $65 Market Value Added (MVA) = $160 Market Value of Equity = $465 Book Value of Equity = $305 Value of Operations = $835 Preferred Stock = $85 Preferred Stock = $85 Debt = $350 Debt = $350 Market Value Sources Market Value Claims Book Value Claims ...
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This note was uploaded on 07/14/2010 for the course UGBA 18195 taught by Professor Johngonzales during the Summer '10 term at University of California, Berkeley.

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