11. Discounted Cash Flow Models

Cash flow definitions and projections

Cash flow based valuations

Free Cash Flow Definitions

Free Cash Flow to Equity (FCFE)

= PAT Change in Working Cap - (Capex Depreciation) + (New debt debt repayment)

= CFO Capex + (New debt debt repayment)

Free Cash Flow to Firm (FCFF)

= EBIT (1-t) Change in Working Cap (Capex Depreciation)

= CFO Capex + Int (1-t)

Forecasting FCFE & FCFF

By detailed financial statement forecasting

Using RoE/RoC & reinvestment rate (see Damodaran)

Estimating Terminal Value (Vn)

V0 = 1+

+ / 1 + =1

Estimating Vn

Liquidation value

Using multiples (relative valuation)

Stable growth model

Vn = CFn+1/(rn gn)