|Author||Topic: Free cash Flow|
|Hi, the last week my boss ask me about a new business scenario and my job was to make a valuation financial model.
here my assumptions:
1-the total firm investment amount for the new project has 70% debt and 30% equity
2- net income + depreciation = Free cash flow
3- I used the total investment amount (for example $1,000,000) for the initial
Cash flow = -1,000,000
I did the IRR and NPV calculation under those assumptions, but my boss told me that I have to substract the debt payment (interest and principal) (I only used the financial statement?s interest payment) for the FCF calculation and I should use only the equity portion ($300,000) as initial cash flow at the time = 0.
So, who is right ?
|Which specific FCF you want? Free Cash Flow to Equity or Free Cash Flow to Firm?
FCFFirm: CF before interest, cash available to all investors (shareholders, bondholders, etc)
FCFEquity: CF after interest, cash available to all shareholders.
Which one should be used? It's a case by case problem.
For example, if you plan to take over the company, use FCFFirm is more appropriate.
On the other hand, you may use FCFEquity to evaluate value of the share.
|WHILE CALCULATING FCFF, DEBT HAS ALREADY BEEN TAKEN CARE OF...SO STICK TO THE FORMULA
FCFF = NET INCOME + DEPRECIATION - INCREASE IN CAPITAL ASSETS-INCREASE IN NET WORKING CAPITAL