4Santikian_FBE 421_sp11_(1)

4Santikian_FBE 421_sp11_(1) - FBE 421: Financial Analysis...

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FBE 421: Financial Lecture 4 Forecasting Financial Performance; Cash Flow Statement Analysis
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Lecture Outline Calculating Free Cash Flow Review Adjustment for interest tax shield in Firm FCF vs. Equity FCF Forecasting Future Financial Performance Step 1: Perform an Analysis of Historical Financial Statements Step 2: Prepare Pro Forma Financial Statements for the Planning  Period Step 3: Convert Pro Forma Statements into Cash Flow Forecasts Step 4: Estimate the Terminal Value of Firm Free Cash Flows Cash Flow Statement Analysis “Solving the Puzzle of the Cash Flow Statement” (HBS note) “Statements of Cash Flows: Three Examples” (HBS case)
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Free Cash Flow (FCF) Investment cash flow is the sum of the cash inflows  and outflows from the project Firm Free cash flow (FCF): amount of cash  produced (by a firm) during a particular time that is  available for distribution to both  the firm’s creditors  and equity holders Values the firm as a whole (both equity and debt claims) Equity free cash flow (EFCF): cash flow available for  distribution to the firm’s common shareholders Values the equity claim in the project Includes cash dividends and share repurchases
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Firm Free Cash Flow FCF = EBIT(1 - T) + DA -WC –CAPEX EBIT: Earnings before interest and taxes EBIT(1 - T): After-tax operating income or net  operating profit after tax (NOPAT) T: Tax rate DA: Depreciation and amortization expense WC: Change in operating net working capital CAPEX: Capital expenditures for property, plant, and  equipment
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Equity Free Cash Flow To calculate Equity FCF, recall that a firm’s FCF is equal to  the sum of the cash flows available to be paid to both  the  firm’s creditors (Creditor CF) and shareholders (Equity FCF). Firm FCF = Creditor CF + Equity FCF  Equity FCF = Firm FCF – Creditor CF Caution : There is one (important) additional point we have to  address before we can calculate Equity FCF….
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Adjustment: Firm FCF When we computed the Firm  Free Cash Flow, we did not  include the interest tax shields (see the FCF expression). FCF = EBIT(1 - T) + DA – WC – CAPEX Remember, when we apply the tax rate, we apply it to all of  the income (EBIT), including the income used to pay  interest (which is, actually, tax-deductible). We do this for the following reason: When we compute present values for Firm  Free Cash  Flow, it is easier to adjust for interest tax shields in the  discount rate (the  denominator  of the DCF expression),  by using WACC. Stay tuned for details later in the course.
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4Santikian_FBE 421_sp11_(1) - FBE 421: Financial Analysis...

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