- CFA Exams
- 2023 Level II
- Topic 5. Equity Valuation
- Learning Module 24. Free Cash Flow Valuation
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Learning Outcome Statements PDF Download
|1. FCFF and FCFE valuation approaches|
compare the free cash flow to the firm (FCFF) and free cash flow to equity (FCFE) approaches to valuation;
explain the ownership perspective implicit in the FCFE approach;
|2. Computing FCFF and FCFE from net income, EBIT, EBITDA, or CFO|
explain the appropriate adjustments to net income, earnings before interest and taxes (EBIT), earnings before interest, taxes, depreciation, and amortization (EBITDA), and cash flow from operations (CFO) to calculate FCFF and FCFE;
calculate FCFF and FCFE;
|3. Forecasting FCFF and FCFE|
describe approaches for forecasting FCFF and FCFE;
|4. Other issues with free cash flow analysis|
compare the FCFE model and dividend discount models;
explain how dividends, share repurchases, share issues, and changes in leverage may affect future FCFF and FCFE;
evaluate the use of net income and EBITDA as proxies for cash flow in valuation;
|5. Free cash flow model variations|
explain the single-stage (stable-growth), two-stage, and three-stage FCFF and FCFE models and select and justify the selection of the appropriate model given a company's characteristics;
estimate a company's value using the appropriate free cash flow model(s);
explain the use of sensitivity analysis in FCFF and FCFE valuations;
evaluate whether a stock is overvalued, fairly valued, or undervalued based on a free cash flow valuation model.
|6. Terminal value|
describe approaches for calculating the terminal value in a multistage valuation model;
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