The level of free cash flows is more usually determined from
the already prepared accounting information and therefore is
found by working back from profits as follows:

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2.Cash based methods

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2.Cash based methods
Free cash flow to equity
•
The above approach calculates free cash flows before
deducting either interest or dividend payments
•
The free cash flow to equity only can be calculated by taking
the free cash flow calculated above and:
deducting debt interest paid
deducting any debt repayments
adding any cash raised from debt issues
•
in practical terms, the free
cash flow to equity determines the
dividend capacity of a firm

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2.Cash based methods
Free cash flow to equity

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2.Cash based methods
Free cash flow to equity

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2.Cash based methods
Free cash flow to equity

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2.Cash based methods
Forecasting growth in free cash flows
•
Historical estimates
For example, if the business has achieved growth of 5% per
annum each year for the last five years, 5% may be a sensible
growth rate to apply to future free cash flows.
•
Analyst forecasts
Particularly fro listed companies, market analysts regularly
procduce forecasts of growth
•
Fundamental analysis
The Gordon's growth approximation(g=rb)can be used to
calculate the likely future growth rate, where r is the company/s
return on equity (cost of equity) and b is the earnings retention
rate. The formula is based on the assumption that growth will be
driven by the reinvestment of earnings.

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2.Cash based methods
Forecasting growth in free cash flows
•
Historical estimates
For example, if the business has achieved growth of 5% per
annum each year for the last five years, 5% may be a sensible
growth rate to apply to future free cash flows.
•
Analyst forecasts
Particularly fro listed companies, market analysts regularly
procduce forecasts of growth
•
Fundamental analysis
The Gordon's growth approximation(g=rb)can be used to
calculate the likely future growth rate, where r is the company/s
return on equity (cost of equity) and b is the earnins retention rate.
The formula is based on the assumption that growth will be
driven by the reinvestment of earnings.