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 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 re-invested. These two effects work in opposite directions, but do not necessarily
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KIC000031 - l ) Free Cash Flow Valuation A more fundamental...

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