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VALAUTION

The document discusses key financial concepts: Free cash flow (FCF) is a major indicator of a company's overall financial health, as more FCF provides more opportunities for expansion and rewarding investors. Companies with low or declining FCF have little money left over after usual expenses. There are different ways to value companies relatively, including enterprise value, price-to-earnings multiples, and enterprise value to EBITDA. Free cash flow to the firm (FCFF) is available for bondholders and stockholders, while free cash flow to equity (FCFE) is for common equity holders only. The weighted average cost of capital (WACC) represents a firm's average cost from all funding sources and is used

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36 views

VALAUTION

The document discusses key financial concepts: Free cash flow (FCF) is a major indicator of a company's overall financial health, as more FCF provides more opportunities for expansion and rewarding investors. Companies with low or declining FCF have little money left over after usual expenses. There are different ways to value companies relatively, including enterprise value, price-to-earnings multiples, and enterprise value to EBITDA. Free cash flow to the firm (FCFF) is available for bondholders and stockholders, while free cash flow to equity (FCFE) is for common equity holders only. The weighted average cost of capital (WACC) represents a firm's average cost from all funding sources and is used

Uploaded by

21358 NDIM
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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• FCF IS A MAJOR INDICATOR OF OVERALL FINANCIAL HEALTH OF AN ENTERPRISE

• More the FCF , more the opportunity for expansion & more the opportunity for rewarding
investors

• An Enterprise with a Low or declining FCF has very little money left after meeting usual liabilities

2. Relative Valuation Method

1. Market Capitalisation

2. Enterprise Value ( EV ) method

3. Price /Earnings Multiple

4. EV / EBITDA

5. EV / Sales or Revenue

• FCF IS A MAJOR INDICATOR OF OVERALL FINANCIAL HEALTH OF AN ENTERPRISE

• More the FCF , more the opportunity for expansion & more the opportunity for rewarding
investors

• An Enterprise with a Low or declining FCF has very little money left after meeting usual liabilities

ULCF- It is the cash flow available to all equity holders and debtholders
after all operating expenses, capital expenditures, and investments in
working capital have been made.

The Difference Between Book Value and Enterprise Value

The book value of a business reflects the theoretical net worth of its


assets according to the accounting figures stated on the balance sheet. The
enterprise value, on the other hand, represents a company’s value according
to the price that investors set out on the market while additionally accounting
for the amount of debt and cash that is within the business.

The weighted average cost of capital (WACC) represents a firm's


average cost of capital from all sources, including common stock, preferred
stock, bonds, and other forms of debt.

• Market cap measures what a company is worth on the open market, as


well as the market's perception of its future prospects, because it
reflects what investors are willing to pay for its stock.

Both FCFF vs FCFE are popular choices in the market; let us discuss some of


the major differences: FCFF is the amount left over for all the investors of the
firm, both bondholders and stockholders while FCFE is the residual amount
left over for common equity holders of the firm

Synergy is the concept that the whole of an entity is worth more than the sum
of the parts. This logic is typically a driving force behind mergers and
acquisitions (M&A), where investment bankers and corporate executives often
use synergy as a rationale for the deal

The DCF approach involves forecasting earnings and forecasting FCF. This is the net cash generated by
the firm through its assets.

The FCF may be categorized as:

• Free cash flow to the firm (FCFF)

• Free cash flow to equity (FCFE)


6. The discount rate is used to calculate the present value of FCFs. When using FCFF, the discount
rate used is WACC. FCFF is the FCF generated to a firm. Hence, to discount FCFF, the overall cost
of capital of the firm is used, that is, WACC.

7. Finacial leverage : ability to raise finance and to be able to earn

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