Interest and taxes eq 11 non cash capital fcff ebit

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Unformatted text preview: egin with earnings before interest and taxes: (EQ 11) ( ) non-cash capital FCFF = EBIT 1 - tax + − increase in rate charges (income) expenditures working capital Recognizing that: (EQ 12) ( ) ( ) ⎡ ⎤ EBIT 1 - tax = Net + ⎢Interest 1- tax ⎥ , rate income rate ⎦ ⎣ we can re-write equation 11 in terms of net income: 1 Michael Jensen, “Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers,” American Economic Review, 76, no. 2 (May 1986), pp. 323–329. 2 If the company has preferred stock and the company pays preferred dividends, the free cash flow to common equity (FCFCE) is the FCFE, less any preferred dividends. 3 (EQ 13) FCFF = ( ) ⎡ ⎤ Net non-cash capital + ⎢Interest 1- tax ⎥ + − increase in income rate ⎦ charges (income) expenditures working capital ⎣ The FCFF is often referred to as the unlevered free cash flow because it is the cash flow before interest on debt is considered. We can reconcile the free cash flow to the firm with the free cash flow to equity by noting that the difference between the two are: Interest paid on debt, and Net new debt financing. In other words, (EQ 14) net Free cash flow to the firm = FCFE + ⎡ interest (1-tax rate ) ⎤ ⎢ expense ⎥ borrowings ⎣ ⎦ Valuation using free cash flow The valuation of a company requires discounting the future cash flow to the present. The cash flows that we use in this valuation are forecasted free cash flows. The model that we use to determine a value today...
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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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