MGMP 543, FINANCE
Topic 17a – Free Cash Flow
Professor Kunal Sachdeva
1
,Today’s Topics – Free Cash Flows
1. Motivation: What is FCFF? Why should you care?
2. Define FCFF
3. Explaining Each Term
4. Calculating FCFF, Examples
5. Final Note, Enterprise Value
2
,What Are We Building Towards?
• Our ultimate goal is to value any firm
• Up to now, we have only valued an all equity firm!
• In doing so, we need to deal with issues of different financing
• We are eventually going to use the WACC to value the firm.
• Further, we need to handle firms that do not out dividends
• There are many firms that do not pay a dividend, and increasingly so…
3
, Previously: Dividend Discount Model (DDM)
• We know how to value the equity of a firm by discounting dividends:
$
𝐷𝐼𝑉!
𝐸𝑞𝑢𝑖𝑡𝑦 𝑉𝑎𝑙𝑢𝑒 = , !
1 + 𝑟%
!"#
• However, dividends are paid at the discretion of the board of directions
• What are some issues with this?
• If the firm is growing, do we want them to pay out dividends? Think PVGO!
• We need a way to value firms that pay no or a low dividend
• What are some examples of this?
• Does this mean the companies equity is worthless?
4
Topic 17a – Free Cash Flow
Professor Kunal Sachdeva
1
,Today’s Topics – Free Cash Flows
1. Motivation: What is FCFF? Why should you care?
2. Define FCFF
3. Explaining Each Term
4. Calculating FCFF, Examples
5. Final Note, Enterprise Value
2
,What Are We Building Towards?
• Our ultimate goal is to value any firm
• Up to now, we have only valued an all equity firm!
• In doing so, we need to deal with issues of different financing
• We are eventually going to use the WACC to value the firm.
• Further, we need to handle firms that do not out dividends
• There are many firms that do not pay a dividend, and increasingly so…
3
, Previously: Dividend Discount Model (DDM)
• We know how to value the equity of a firm by discounting dividends:
$
𝐷𝐼𝑉!
𝐸𝑞𝑢𝑖𝑡𝑦 𝑉𝑎𝑙𝑢𝑒 = , !
1 + 𝑟%
!"#
• However, dividends are paid at the discretion of the board of directions
• What are some issues with this?
• If the firm is growing, do we want them to pay out dividends? Think PVGO!
• We need a way to value firms that pay no or a low dividend
• What are some examples of this?
• Does this mean the companies equity is worthless?
4
