42 calculating free cash flows investors care about

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Unformatted text preview: tion - Include working capital requirements - Forget sunk costs - Include opportunity costs - Beware of allocated overhead costs 6.4.2 Calculating free cash flows Investors care about free cash flows as these measures the amount of cash that the firm can return to investors after making all investments necessary for future growth. Free cash flows differ from net income, as free cash flows are - Calculated before interest Excluding depreciation Including capital expenditures and investments in working capital Free cash flows can be calculated using information available in the income statement and balance sheet: (40) Free cash flow profit after tax  depreciation  investment in fixed assets  investment in working capital 6.4.3 Valuing businesses The value of a business is equal to the present value of all future (free) cash flows using the after-tax WACC as the discount rate. A project’s free cash flows generally fall into three categories 1. Initial investment – Initial outlay including installation a...
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