But what are these cash flows and how do we estimate

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Unformatted text preview: But what are these cash flows and how do we estimate them? Estimates of cash flows Cash flows have been estimated a number of ways, which adds to the confusion about how we should value a company. Consider the simplest form of cash flow, which is the earnings before depreciation and amortization, EBDA. This cash flow is sometimes referred to as the accounting cash flow because before we had the statements of cash flow or the older, funds flow statement, EBDA was often used as a quick estimate of cash flow. The calculation is simple and only requires information from the income statement: (EQ 1) EBDA = Net income + depreciation + amortization In the EBDA, we are adding the primary non-cash expense that had been deducted to arrive at net income. If we are valuing a company, however, we must consider that the cash flow should be that available to the suppliers of capital – i.e., creditors and owners. Because interest is deducted to arrive at net income, what we need is a cash flow before any interest. This then provides an estimate of cash flow that could be paid to both creditors and owners. This cash flow is referred to as earnings before interest, depreciation, and amortization, or EBITDA: (EQ 2) EBITDA = Net income + interest + depreciation + amortization Analysts look at a company’s EBITDA because this enables comparison of the results from operations among companies in the same line of business that should have similar operating cost structures....
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This homework help was uploaded on 02/24/2014 for the course BUS 101 taught by Professor Lipsitz during the Spring '14 term at International University.

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