Chapter 4, 7, 8
FCFE - Free Cash Flow to Equity → FCFE use rE
FCFF - Free Cash Flow to Firm → FCFF use WACC
Could make analyses which factors are affecting the firms growth, profit and
risk ect.
- Macro
- SWOT (Strength, Weakness, Opportunities, threats)
Ratios
- Profitability
- Growth
- D/E ratio
- Efficiency etc
To use the model the firm has to
- Stable and relative low growth in profit and dividends (mature firm)
- Continuous payment of dividend that are similar FCFE
- stable capital structure
Dividend valuation gives lower value than the actual dividends
FCFE - model
◼ The company operates in a mature industry and the company is not different from
the industry average
◼ The size of investment is consistent with the size of depreciation
◼ Beta near or below 1
◼ Stable capital structure
FCFF - model
◼ Can be used in a similar way that models based on FCFE - both one and several
periods
◼ Cash flow is defined such that it is independent of capital structure.
◼ Discounting with the WACC.
FCFE - Free Cash Flow to Equity → FCFE use rE
FCFF - Free Cash Flow to Firm → FCFF use WACC
Could make analyses which factors are affecting the firms growth, profit and
risk ect.
- Macro
- SWOT (Strength, Weakness, Opportunities, threats)
Ratios
- Profitability
- Growth
- D/E ratio
- Efficiency etc
To use the model the firm has to
- Stable and relative low growth in profit and dividends (mature firm)
- Continuous payment of dividend that are similar FCFE
- stable capital structure
Dividend valuation gives lower value than the actual dividends
FCFE - model
◼ The company operates in a mature industry and the company is not different from
the industry average
◼ The size of investment is consistent with the size of depreciation
◼ Beta near or below 1
◼ Stable capital structure
FCFF - model
◼ Can be used in a similar way that models based on FCFE - both one and several
periods
◼ Cash flow is defined such that it is independent of capital structure.
◼ Discounting with the WACC.
