Case, Cash Flows and Pro Formas

Case, Cash Flows and Pro Formas - EBIT ignores interest •...

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Case: Cash Flows and Pro Formas Cash flows are fundamental driver of shareholder value Simpler way to come up w/ cash flows, discount them, and compute NPV Ex. A: o Sales goes 3% growth to 2% o Net working capital goes from 20% of sales to 25% o Compute B/S, I/S, cash flows is a complex method o Since depreciation expense involves no cash flow, we add it back to get cash flows o FCF = EBIT (1 – Tax) + Deprec. + Inc. NWC – CAPEX
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Unformatted text preview: EBIT ignores interest: • Unlevered cash flow assumes firm is entirely funded w/ equity • To account for rate assumption: o WACC accounts for debt o So next account for debt by calculating WACC • What would happen to market premium if people became more risk averse? o It would go up • NPV at rate of 10.8% = higher value than at 15% o Takeaway: This is economic reality, not accounting reality...
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