# Millions 3842 2771 4664 1051 133 113 3318 380 158 385

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Unformatted text preview: inancing [calculated as: \$1,031 – 633] Interest expense Tax rate (estimated as \$1,735 / \$4,506) Amount in millions \$3,842 \$2,771 \$4,664 \$1,051 \$133 \$113 \$3,318 \$380 \$158 38.5% Income statement Balance sheet Statement of cash flows √ √ √ √ √ √ √ √ √ √ √ Therefore, assuming that all capital expenditures are necessary for maintaining the current growth, the free cash flows for 2005, in millions, are: Free cash flow Equation Calculation Free cash flow to equity EQ 8 \$3,842 – 3,318 + 380 = \$904 EQ 9 \$2,771 + 1,051 + 133 - 3,318 – 113 + 380 = \$904 EQ 10 \$3,842 + 158 (1 - 0.385) - 3,318 = \$621 EQ 11 \$2,868 + 1,051 + 133 – 3,318 - 113 = \$621 EQ 13 \$2,771 + 1,051 + 133 + 158 (1-0.385) – 3,318 - 113 = \$621 EQ 14 \$904 + 158 (1 – 0.385) - 380 = \$621 Free cash flow to the firm Suppose Lowe’s cash flows are expected to grow at rate of 21 percent for the next five years and then 4.5 percent thereafter. If the cost of equity is 8.5 percent and the weighted average cost of capital is 7.5 percent, the valuation of the company and of the equity is calculated as \$55 billion and \$44 billion respectively: in millions Value of the firm Value of equity FCF1 \$751 \$1,094 FCF2 \$909 \$1,324 FCF3 \$1,100 \$1,601 FCF4 \$1,331 \$1,938 FCF5 \$1,611 \$2,345 Horizon value \$67,328 \$61,256 Value today \$49,422 \$43,891 5 Issues There are a number of issues that arise in calculating and using free cash flows in valuation. These issues include: The different definit...
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