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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;
RWACCg
::.f"'D~
Bond Prices and Returns:
Current Yield
•
Also called the current return on a bond.
•
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
reinvested.
•
These two effects work in opposite directions, but do not necessarily
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 Fall '10
 Sapp
 Valuation

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