Financial Accounting Module 7

Financial Accounting Module 7 What are retained earnings, and how do you calculate them? Retained earnings is an owners' equity account that reflects the earnings that have been retained in the business to finance growth or future operations. Retained Earnings=Net Income +retained earnings of previous year - dividends to be paid What is the Free Cash Flow, and how do you calculate it? Free Cash Flow is an indication of how much actual cash is generated and available to be paid out to investors or invest in new projects FCF = (1-t) x EBIT + DEP - CAPX - deltaNWC What is Capital Expenditures When cash is actually paid for property and equipment regardless of when the depreciation is recognized on the asset. What is the Gordon Growth Model? Determines the terminal value of cash flows of cash flows that are assumed to continue indefinitely PV of Infinite Cash Flows= Cash flows in final year/ (discount rate- growth rate) What is NPV? Net Present Value- the value of the project. NPV nets out the present values of all the cash inflows and outflows of the project. NPV= initial investment +PV of operating cash flows =NPV (rate, value, value) If NPV is negative, should you invest in the project? NO- this means the outflows are greater than the inflows What is the IRR IRR is the internal rate of return. IRR is the discount rate that sets the NPV to 0 What is the WACC Weighted Average Cost of Capital WACC is the discount rate that many companies use in the NPV calculation. If a project or investment cannot return more than the WACC, the company would lose money on the investment.