Valuation Slides Week1 1 - Intro and FFCF Previtero

Valuation
MBA FIN 286

Alessandro Previtero
Slide Pack Week 1 Part 1
Company Valuation Introduction and
FFCF
Logistics
I.
My CV/Research
II.
Syllabus:
a) Office Hours
- Thu 2:30-4:30pm CBA 6.228
b) TA Review Sessions :
- TBD
c) Textbook
d) Assignments/Cases
e) Grading
f) Classroom Policies
g) Discussion Board
h) News of the day
III. Slides
IV. Make-up class this FRIDAY same time same room.
Overview - 2
Overview of the course

I.
Company Valuation
Introduction: Accounting Principles
Discounted Cash Flow (DCF) Models
FFCF
Discount Rate
No Friction Model
WACC (Weighted Average Cost of Capital)
APV (Adjusted Present Value)
Multiples
Other topics: Other valuation models, LBOs, M&A, etc.
II.
Introduction to Options
Financial options
Binomial model
Black-Scholes-Merton model
Real options
Overview - 3
Todays Content
I.
http://www.cnbc.com/2015/10/16/so-how-much-is-uber-reallyworth.html
II.
Introduction to Accounting Principles

a. Balance Sheet
b. Income Statement
III. Introduction to Discounted Cash Flow Models

IV. Firm Free Cash Flow
V.
Homework Assignment #1
VI. Problems
Overview - 4
I. Company Valuation
Introduction Accounting Principles

Multiples
Other topics: LBOs, M&A, etc.
Review of Accounting Principles

Annual Report (SEC 10-K)
Management Discussion and Analysis (MD&A)
Financial Reports
Balance Sheet (BS)
Income Statement (IS)
Cash Flow Statement (CFS)
Supporting Documents
Proxy Statement (Shareholders Meeting Statement) (SEC DEF14A)
Voting procedure and information
Background information about the company's nominated
directors
Director compensation
Executive compensation
A breakdown of audit and non-audit fees paid to the auditor
Source: http://www.sec.gov/ or Mergent Online or S&P Capital IQ or
Companys Website
Company Valua6on Introduc6on - 6
Accounting Principles Balance Sheet

Balance Sheet: a quantitative summary of a company's financial
condition at a specific point in time
Balance sheet items and names can vary significantly across firms
Balance Sheet (BS)
Assets
Cash & Marketable
Securities (Cash)
Inventories (Inv)
Accounts receivable (AR)
Property, Plants and
Equipment (PPE)
Liabilities and Equity

Accounts Payable (AP)
Short Term Debt (STD)
Long Term Debt (LTD)
Preferred equity (PE)
Ordinary equity (CE)
...
Harley Davidsons
Balance Sheet
FY 2012

In Corporate Finance, we use a simplified balance sheet, common to
all companies.
Simplified Balance Sheet
Assets
Non-Operating Assets (NOA) =

Excess Cash + Other Assets
Net Working Capital = Op.
Cash + Inv + AR AP
Debt = STD+LTD
Equity= PE+CE
Property Plant and Eq.

In Corporate Finance, we use a simplified balance sheet, common to
all companies.
Simplified Balance Sheet
Assets
Net Working Capital
Net Debt = Debt NOA
Property Plant and Eq.
Equity
Accounting Equivalence: A = D+E
Accounting Principles Income Statement
Simplified
Income Statement
Income Statement: an accounting of sales, expenses, and net profit

for a given period
Revenues Costs (COGS & SG&A) =

EBITDA Depreciation & Amortization (DA) =
EBIT Interest =
EBT
Taxes=
Earnings
Harley Davidsons Income Statement in 10K

HOG
Income
Statement
FY 2012
Accounting Terminology
Annual Report = Annual Accounts = Financial Statement = 10-K
Balance Sheet = Statement of Financial Position= Statement of
Condition
Invested Capital = D + E NOA
Leverage = D/(D+E)
Income Statement = Income and Expense Statement = Statement
of Earnings = Profit and Loss Account (P&L)
Revenues = Sales = Top Line
EBITDA = Operational Cash Flow = Operating Cash Flow
EBIT = Operating Income = Operating Profit
Earnings = Net Earnings = Net Income = Profit (or Loss) = Bottom
Line
Shareholders = Equity holders = Stock holders
Stakeholders = Shareholders, bondholders, employees, suppliers,
customers, government,. Anybody who has a stake in the
company
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/
datafile/variable.htm
FFCF
Discount Rate
No Friction Model
Multiples
Valuation in the real world (1/2)

Capital budgeting methodologies
IRR
NPV
Hurdle rate
Payback
Sensitivity analysis
Earnings multiple
Discounted payback
Real options
Book rate of return
VaR
Profitability index
APV
0
10
20
30
40
50
60
70
80
Legend: % of CFOs who always or almost always uses a certain technique

Source: Graham and Harvey, Journal of Financial Economics 2001
Company Valua6on DCF Models - 15
How to Value an Asset?

An asset is characterized by
Owner
Stream of cash flows (risky or not)
Can be tradable or non-tradable
General framework to value an asset: discounting future expected
cash flows = Discounted Cash Flow (DCF) Model
E[CFt ]
V =
t
(
)
1
+
r
t =0
o CF = Cash Flow
o r = Discount Rate
The DCF model can be used for a multitude of purposes (firm
valuation, real estate rent setting, bond pricing, retirement plans,
investment decisions, )
How to Value a Company?

Using the DFC Model, we can find the Enterprise Value of a firm
(Enterprise Value = Firm Value = Value of the Assets)
1. Estimate Firm Free Cash Flow (FFCF)
2. Discount using the appropriate discount rate ( r )
E[FFCFt ]
VA =
= Enterprise Value
t
(1 + r )
t =0
The market value of equity (MVE) and the stock price (P) are
obtained by:
MVE = VA + NOA MVD
MVE
P=
N
MVD: market value of debt

NOA: value of non-operating assets
N: Number of shares outstanding
Caveats on cash flow estimation

1. Cash flow estimation usually requires analyzing the firms
competitive position and the economic / industrial context
2. Cash flow estimation is usually done for a period of 3 to 5 (up to 10)
years, or up to the moment we expect the firm to attain some longrun equilibrium with a constant growth rate (Residual or Terminal
Value)
E[FFCFt ] E[RV ]
VA =
+
t
T
(
)
(
)
1
+
r
1
+
r
t =1
T
3. Financial investments and other assets not necessary for business

operation should be valued separately and added to the value
obtained by discounting free cash flows
DCF: Pros and Cons
PROS
The process of doing a DCF helps you learn how the business operates
(e.g. Do they have fat/thin or stable/vola6le opera6ng margins/sales ? Do
they spend a lot on marke6ng? on R&D? Is the business capital intensive,
or capital light?)
The model is very amenable to sensi6vity analysis, which allows you to
get an understanding of the important value drivers
DCF value should be less aected by the current mood of the market
i.e., panic or euphoria DCF can help you detect a bubble
DCF is fundamental value; PV of the cash ows received as an owner is a
powerful idea. The projec6ons can accommodate superior informa6on
CONS
DCF Model
GIGO Garbage In, Garbage Out

The model can be tweaked by a skilled prac66oner to say just about
anything (There are a lot of dials to turn, and if you turn them all in the
same direc6on you can sway the value, even if no one of the dials looks
unreasonable on its own)
Youre forced to try and predict the future, which is, of course, impossible
AND an uncomfortable way to work
Annuity and Perpetuity Formulas

If FCF is constant forever:
V A, 0
FCF1
=
= Perpetuity
r
If FCF grows at a constant rate g forever:
V A, 0
FCF1
=
= Growing Perpetuity
rg
If FCF is constant for T periods:
V A, 0
FCF1 1
=
1
= Annuity
r 1 + r
If FCF grows at a constant rate g for T periods:
V A, 0
T
FCF1 1 + g
=
1
= Growing Annuity
r g 1 + r
FFCF
Discount Rate
No Friction Model
Multiples
Firm Free Cash Flow (1/5)

Firm Free Cash Flow (FFCF): Incomings and outgoings of cash,
representing the activities of a firm for a given period
Firms perspective (not equity holders !)
Use cash items only
BS
Taxes
A FFCF
IS
D
E
Revenues Costs (COGS & SG&A) =

EBITDA Depreciation & Amortization (DA) =
EBIT Interest =
EBT
Taxes=
Earnings
Gov.
FFCF = FFCF from Operating Activities + FFCF from Investing Activities
Company Valua6on FFCF - 22

FFCF from Operating Activities Earnings
Non-cash items (DA)
Interests
Tax Shields
FFCF from Operating Activities = (Revenues Costs)(1-tC) + DA*tC =
EBITDA
DA Tax Shield
= (Revenues Costs DA)(1-tC) + DA

EBIT
Add back DA

FCF from Investing Activities
1. Changes in Net Working Capital (NWC) = changes in the
capital (cash) required to manage the financing needs of the
firm
2. Capital Expenditures (Capex) = long-term (> 1 year) investment
in tangible and non tangible assets. Include all acquisitions
(cash but also stock acquisitions)!
3.
Asset Sales (AS) = Asset liquidation or sale to third party
4.
Capital Gain Taxes (CGT) = If the market value of the asset

(MVA) is different from the book value of the asset (BVA):
Capital gain taxes (or capital loss tax credit) = (MVA-BVA)*tC
FFCF from Investing = NWC Capex + AS CGT


FFCF=(Rev Costs)(1-T) + DA*T - NWC Capex + AS CGT
FFCF from Operating Activities
FFCF from Investing Activities
FFCF=(Rev Costs-DA)(1-T) + DA - NWC Capex + AS CGT

Consider the following accounting

data ($000,000):
What is the Firm Free Cash Flow
(FFCF) in year 1?
Year
Revenue
Direct Costs
Indirect Costs
Depreciation
Tax Rate
Debt
Interest Rate on Debt
Working Capital
Gross Fixed Assets
2,000
3,000
10,000
1
1,000
500
200
50
30%
2,100
5%
3,300
10,050
Solutions
FFCF=EBIT*(1-T) + DA - NWC Capex + AS CGT
EBIT = 1000 500 200 50 = 250

DA = 50
NWC = 3300-3000 = 300
Capex = 10050 10000 = 50
Used a trick for Capex. In the absence of further information, we can

approximate Capex, as the difference in Gross Fixed Assets
Then FFCF = 250 (1 - .3) + 50 300 50 = - 125
What is the FFCF of HOG in FY2015
How do you forecast FFCF?

When a firm earns above their risk-adjusted rates of
return, it creates value.
The most important step in understanding how a
company creates value is to analyze its business
environment
1. Analysis of macro-economic conditions
2. Analysis of industry dynamics
3. Analysis of intra-industry firms competitive
advantage
4. Analysis of firms historical performance
1. Macro-economic conditions
Key question: how will the economy fare in the future?
Population and demographics
Gross National Product (GNP)
Labor market, unemployment
Business cycle
Inflation
Fiscal policy and taxation
International trade, exchange rate and globalization
2. Industry dynamics
Key question: What are main trends and characteristics
of the industry the firm is in?
Industry analysis using Porters Five Forces
Intensity of the rivalry among industry competitors
Threat of new entrants into the industry
Threat of substitution (substitute for the industrys
products and services
Bargaining power of the buyers of the industrys
product
Bargaining power of the suppliers of inputs for the
industry
2. Industry dynamics
3. Intra-industry competitive advantage

Key question: Does the firm have a competitive
advantage compared to its competitors? If yes, which
type?
Product differentiation (superior quality, variety,
delivery or service, image, brand, R&D)
Cost leadership (economies of scale/scope,
efficiencies in production or distribution, simpler
designs, better technology, lower input costs, better
cost controls)
Examples of competitive advantage: Product price
reductions (e.g., Walmart), Product innovations (e.g.,
Apple), Product delivery innovations (e.g., Amazon),
Lower production costs (e.g., outsourcing)
3. Intra-industry competitive advantage

Is the competitive advantage sustainable? Why? For
how long?
What prevents other firms from copying the firm and
eliminating the competitive advantage? Whats the
barrier? What are the unique competencies that the firm
possesses?
How isolate the rents are from customers and suppliers?
The economic environment changes quickly over time.
In a financial forecasts, these changes have to be
considered and modeled accordingly.
4. Firms historical performance

Financial ratios are useful when analyzing a firms
historical performance and forecasting financial
statements:
Hard to find out what is a good or a bad level
Ratios vary over time and across industries.
Comparing ratios with competitors and comparable
companies is crucial.
Different ratios are used in different industries.
Ratios are used in bank covenants (working capital,
leverage, direct dividend constraints,)
Ratios are used in some compensation contracts to
incentivize managers to perform
Most commonly used financial ratios

Profitability ratios: ROA, ROC, ROE.
Margin ratios: Gross margin, SG&A margin, EBITDA
margin, EBIT margin, profit margin.
Asset turnover ratios: Total asset turnover, AR turnover,
inventory turnover.
Solvency ratios: current ratio (CA/CL), total debt to
equity ratio, total debt to capital ratio, LT debt to capital
ratio, TL/TA, EBIT/ Interest expense, EBITDA/ Interest
expense.
Growth ratios: revenue, EBITDA, EBIT, Net Income,
EPS, total assets, capex.
Financial ratios for HOG
Harley-Davidson Inc (NYS: HOG): Ratios

Date
Profitability
Return on Assets %
Return on Capital %
Return on Equity %
12/31/2001 12/31/2002 12/31/2003 12/31/2004 12/31/2005 12/31/2006 12/31/2007 12/31/2008 12/31/2009 12/31/2010 12/31/2011 12/31/2012 12/31/2013 3/31/2014 6/30/2014 9/30/2014
Q1
Q2
Q3
14.0%
18.6%
24.9%
15.0%
19.4%
26.0%
15.5%
19.3%
25.7%
16.2%
19.7%
27.6%
18.3%
22.4%
31.1%
18.9%
23.4%
37.8%
16.5%
20.9%
39.3%
7.9%
10.3%
29.3%
-0.6%
-0.7%
-2.6%
1.6%
1.8%
6.6%
6.2%
7.4%
24.8%
6.8%
8.1%
24.4%
7.8%
8.9%
24.4%
10.9%
12.9%
33.7%
14.1%
16.2%
42.1%
6.0%
6.9%
18.3%
42.9%
16.3%
23.9%
19.6%
12.3%
42.0%
14.8%
25.0%
20.9%
13.5%
43.9%
13.9%
28.1%
24.1%
15.5%
45.6%
13.6%
30.3%
26.3%
16.7%
45.6%
13.4%
30.4%
26.8%
16.9%
46.0%
13.5%
30.6%
27.1%
16.8%
44.7%
14.6%
28.1%
24.8%
15.1%
42.8%
16.5%
23.6%
19.5%
10.4%
44.5%
20.5%
15.3%
10.1%
-1.2%
50.1%
21.3%
23.3%
15.8%
3.1%
46.7%
19.9%
25.1%
20.1%
11.3%
46.9%
19.9%
26.1%
21.5%
11.2%
46.9%
19.1%
26.9%
22.4%
12.4%
47.2%
16.0%
30.0%
26.1%
15.4%
51.4%
14.3%
36.3%
29.5%
17.7%
59.4%
21.5%
36.3%
20.4%
11.5%
114%
28
19
112%
38
19
100%
41
22
97%
41
22
108%
44
24
112%
41
20
109%
32
16
76%
19
14
52%
16
13
51%
16
13
55%
21
11
61%
21
13
63%
20
12
71%
19
14
79%
25
20
52%
16
10
2.3
34.0%
25.4%
16.1%
43.7%
28.3
34.5
2.1
34.2%
25.5%
12.7%
42.2%
59.5
71.1
2.9
33.6%
25.2%
17.0%
39.9%
67.1
78.3
2.8
40.3%
28.7%
17.7%
41.3%
61.7
71.1
3.6
39.1%
28.1%
23.3%
41.3%
42.2
47.8
2.2
61.8%
38.2%
19.5%
50.2%
28.2
31.8
1.8
88.4%
46.9%
21.9%
58.0%
18.8
21.3
2.1
185.0%
64.9%
36.1%
73.0%
8.5
10.3
1.9
270.7%
73.0%
52.7%
77.0%
1.6
2.4
2.0
260.7%
72.3%
56.8%
76.6%
2.1
3.1
1.7
236.4%
70.3%
47.2%
75.0%
3.9
4.9
2.7
199.5%
66.6%
57.1%
72.1%
5.0
6.0
1.6
174.8%
63.6%
41.3%
68.0%
6.3
7.5
1.5
161.2%
61.7%
39.6%
67.5%
10.6
12.2
1.8
159.2%
61.4%
43.5%
66.6%
14.3
17.7
1.6
165.8%
62.4%
40.9%
67.2%
6.6
11.8
21.6%
26.5%
29.0%
32.5%
32.6%
23.8%
11.5%
13.0%
28.2%
31.4%
31.1%
31.6%
27.5%
-29.8%
8.5%
17.1%
18.5%
16.9%
19.8%
11.4%
-6.0%
6.5%
7.0%
8.7%
7.8%
15.8%
-4.2%
-7.1%
8.6%
9.7%
10.5%
8.7%
15.4%
5.3%
10.7%
-1.3%
-8.7%
-9.2%
-10.5%
-3.1%
2.2%
10.3%
-2.3%
-18.7%
-23.7%
-33.5%
-31.9%
38.4%
-4.1%
-23.4%
-48.2%
-58.5%
-108.9%
-108.8%
16.9%
-49.7%
-2.6%
52.7%
55.7%
-365.9%
-364.5%
3.0%
46.3%
11.6%
19.9%
41.7%
308.8%
317.7%
2.6%
10.6%
6.0%
9.3%
12.8%
4.1%
6.2%
-5.2%
0.0%
6.4%
8.7%
10.1%
17.6%
21.4%
2.6%
10.2%
19.6%
30.8%
36.3%
44.9%
44.9%
3.5%
-50.3%
39.5%
83.2%
78.2%
93.0%
94.1%
7.1%
43.1%
-14.0%
19.2%
-19.8%
-18.2%
-16.9%
6.6%
131.0%
Margin Analysis
Gross Margin %
SG&A Margin %
EBITDA Margin %
EBIT Margin %
Net Income Margin %
Asset Turnover
Total Asset Turnover
Accounts Receivable Turnover
Inventory Turnover
Short Term Liquidity
Current Ratio
Total Debt/Equity
Total Debt/Capital
LT Debt/Capital
Total Liabilities/Total Assets
EBIT / Interest Exp.
EBITDA / Interest Exp.
Growth Over Prior Year
Total Revenue
EBITDA
EBIT
Net Income
Diluted EPS before Extra
Total Assets
Capital Expenditures
How to Forecast FCF: Sales growth

Sales growth. Usually estimated in the following way:
1. Forecasting market share growth and industry growth; Use results
of the analysis on the macro-economic condition, industry trends,
within-industry competition, and firms historical performance.
2. The planning period should be of a length such that the transition to
the steady-growth stage is smooth. In our last forecasting period,
the growth rate in firm free cash flows should correspond to the
assumed long-run growth for sales
3. Long-run growth in perpetuity should not exceed excessively from
the average growth rate of economy (in nominal terms). With an
inflation of 3%, this number should be between 4% and 6% (1% to
3% of growth in real terms). However, it can be lower (even
negative) if your outlook for the company is negative.
How to Forecast FCF: EBITDA margins, Working

Capital and Depreciation
EBITDA margin. Equal to historical average, where more weight is
given to recent information.
Working Capital is almost always assumed to be a fraction of sales,
and estimated as an historical average. However, if changes are
anticipated in terms of how fast the firm has to pay suppliers, etc., then
we should incorporate this into our estimate for the future.
Depreciation:
1. As a % of capex. For a mature company, or for the terminal value,
this ratio should be ~95%!
2. By explicitly assuming an average useful life for CAPEX (more
complicated, but more accurate).
How to Forecast FCF: Capital Expenditures

Capital Expenditures correspond to variation in gross fixed assets,
which is equivalent to variation in net fixed assets plus depreciation.
We need to adjust what the firm reports as net fixed assets, by
summing other items we also consider as relevant from an
operational standpoint (e.g. goodwill). Note that CAPEX also
includes cash flows spent with acquisitions, and so not considering
goodwill as a fixed asset would bias downwards our CAPEX
estimate.
Capital Expenditures may be estimated in the following way:
1. As a % of sales (looking at historical averages);
2. By explicitly assuming an average useful life for CAPEX (more
complicated, but more accurate).
Homework Assignment #1
Individual Assignment posted on course website
Objective: Choose a company that you will value
during the rest of the course, and compute historical
FFCF
I suggest that you select a company that is NOT:
Diversified (conglomerate)
Newly IPO
Multinational corporation
In financial distress/near bankruptcy
In the financial services industry
You can use the HOG spreadsheet as template
Due Mon Jan 25th at the beginning of class
Paper format only. Do not email me with the
assignment. If you can not attend the class, please
give it to one of your classmates.
Reminder:
Fill up the classroom policy survey by tomorrow
(Thursday) at 5pm
Make-up class this Friday same room same time.
Problems on DCF and FFCF

Problem #1: Your firm just purchased a small start-up with
proprietary data transfer technology for $50 million. You are
considering whether to upgrade your current network of wires and
data relay stations. You calculate that a new network will generate
$200 million per year in sales (versus $90 million in sales using the
old network) and that annual costs will be $55 million (versus $65
million with the old system). The initial capital cost of the new
network is $900 million, payable immediately. Construction of the
new network will require that you cannibalize parts from the old
one, rendering it useless. The new network will have salvage value
of $300 million in 6 years. Taxes are 40% and straight-line
depreciation is used for tax purposes. Running the new network will
require an increase of $20 million in working capital, which is fully
recoverable in six years. The discount rate is 12%. Should you
construct the new network?

Problem #2: The Best Manufacturing Company is considering a
new investment. Financial projections for the investment are
tabulated below. Cash flows are in $ thousands, and the corporate
tax rate is 34 percent. Assume all sales revenue is received in cash,
all operating costs and income taxes are paid in cash, and all cash
flows occur at the end of the year.
Year 0 Year 1 Year 2 Year 3 Year 4
Investment
10,000 Sales Revenue
7,000 7,000 7,000 7,000
Operating Costs
2,000 2,000 2,000 2,000
Depreciation
2,500 2,500 2,500 2,500
Net Working Capital 200
250
300
200
(end of year)
a) Compute the incremental net income of the investment in each year.
b) Compute the incremental cash flows of the investment in each year.
c) Suppose the appropriate discount rate is 12 percent. What is the
NPV of the project?

Problem #3: Suppose you can purchase a machine for $120,000
that will generate real revenues of $80,000 per year for 3 years.
Using straight-line depreciation and assuming a corporate tax rate
of 40% and a discount rate of 10%, what is the net present value of
the machine? What happens if the inflation rare is 20%?
Problem #4: Consider building a new plant for $4 million. Monthly
sales will be $4 million. The firm maintains 90 days of inventory.
The average collection period is 60 days while suppliers are paid in
30 days. The cost of goods sold is 50% of sales and other
expenses are 25% of sales. Purchases occur at the beginning of
the month, while sales occur at the end of the month. The firms
current bank balance is $7 million. A balance equal to 20% of
monthly sales must be maintained. What are the firms net working
capital requirements?
Problems on Annuity and Perpetuity

Problem #5: What is the value of the following cash flow streams if
the discount rate is 15%?
0
a.
10
10
10
10
10
10
10
b.
10
10
10
10
10
10
10
10
c.
10
11
12.1
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g.
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Results

Valuation Slides Week1 1 - Intro and FFCF Previtero

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Valuation

MBA FIN 286

Overview of the course

Introduction to Accounting Principles

III. Introduction to Discounted Cash Flow Models

Introduction Accounting Principles

Review of Accounting Principles

Accounting Principles Balance Sheet

Liabilities and Equity

Company Valua6on Introduc6on - 7

Company Valua6on Introduc6on - 8

Accounting Principles Balance Sheet

Non-Operating Assets (NOA) =

Liabilities and Equity

Property Plant and Eq.

Company Valua6on Introduc6on - 9

Accounting Principles Balance Sheet

Liabilities and Equity

Net Working Capital

Net Debt = Debt NOA

Property Plant and Eq.

Accounting Equivalence: A = D+E

Company Valua6on Introduc6on - 10

Accounting Principles Income Statement

Income Statement: an accounting of sales, expenses, and net profit

Revenues Costs (COGS & SG&A) =

Harley Davidsons Income Statement in 10K

Company Valua6on Introduc6on - 12

Valuation in the real world (1/2)

Legend: % of CFOs who always or almost always uses a certain technique

How to Value an Asset?

How to Value a Company?

MVE = VA + NOA MVD

MVD: market value of debt

Caveats on cash flow estimation

3. Financial investments and other assets not necessary for business

Company Valua6on DCF Models - 18

DCF: Pros and Cons

GIGO Garbage In, Garbage Out

Annuity and Perpetuity Formulas

If FCF grows at a constant rate g forever:

If FCF is constant for T periods:

If FCF grows at a constant rate g for T periods:

Firm Free Cash Flow (1/5)

Revenues Costs (COGS & SG&A) =

Firm Free Cash Flow (2/5)

= (Revenues Costs DA)(1-tC) + DA

Company Valua6on FFCF - 23

Firm Free Cash Flow (3/5)

Asset Sales (AS) = Asset liquidation or sale to third party

Capital Gain Taxes (CGT) = If the market value of the asset

FFCF from Investing = NWC Capex + AS CGT

Firm Free Cash Flow (4/5)

FFCF from Investing Activities

FFCF=(Rev Costs-DA)(1-T) + DA - NWC Capex + AS CGT

Consider the following accounting

FFCF from Investing Activities

Company Valua6on FFCF - 25

FFCF from Investing Activities

EBIT = 1000 500 200 50 = 250

Used a trick for Capex. In the absence of further information, we can

Company Valua6on FFCF - 26

What is the FFCF of HOG in FY2015

Company Valua6on FFCF - 27