Chapter 6. Free Cash Flow Valuation

LEARNING OUTCOMES After completing this chapter, you will be able to do the following: 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; 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; describe approaches for forecasting FCFF and FCFE; 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; explain the single-stage (stable-growth), two-stage, and three-stage FCFF and FCFE models and select and justify the appropriate model given a company’s characteristics; estimate a company’s value using the...