KIC000031 - l Free Cash Flow Valuation A more fundamental...

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) Free Cash Flow Valuation • A more fundamental approach to valuation, which can be applied to any finn regardless of whether it pays dividends, focuses on free cash flows (FCFs). • FCF is money available to pay investors after investment. • FCF = EBIT( I- Tc) + Depreciation - CAPEX - ~C • We can value the stream ofFCFs, discounted at the WACC, to arrive at the Enterprise Value of the firm. Enterprise Value of Firm = FCF; RWACC-g ::.f"'D-~ Bond Prices and Returns: Current Yield • Also called the current return on abond. • Current yield is the annual coupon of a bond expressed as a percent of its market price, P. c Cy=- p • Current yield gives the return~v~~.l.ll.n~ termsofthe~ I I f Bond Risk • Defaldt ri.1e is risk from the possibility that the issuer will uot be able to pay coupon interest and face value as promised. • ]IIterest me risk is risk from interest rate changes during a bond's term. Interest rate risk has two components: Price Rl.k refers to the change in the market price of a bond which results from a change in interest rates. Reinvestment Rate RIsk refers to the uncertainty about the rate at which future coupon payments from a bond may be re-invested.
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