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The Free Cash Flow method is an expression of the amount of cash that is
available for the stockholders.
Free Cash Flow Calculation
Net Operating Profit
- Taxes
------------------------------------------------------
= NOPAT
- Net Investment
- Net Change in Working Capital
------------------------------------------------------
= Free Cash Flow
How do corporations earn money?
They earn money by operating business units where it manufactures products
or provides services. A company generates revenue by selling its products
and services to another party. In generating revenue, a company incurs expenses
- salaries, cost of goods sold (CGS), selling and general administrative expenses
(SGA), research and development (R&D). The difference between operating revenue
and operating expense is Operating Income or Net Operating Profit.
The cost of Capital, taxes and Free Cash flow
To produce revenue a firm not only incurs operating expenses, but it also
must invest money in real estate, buildings and equipment, and in working
capital to support its business activities. Also, the corporation must pay
income taxes on its earnings. The amount of cash that's left over after the
payment of these investments and taxes is known as Free cash flow (Free Cash
Flow).
The use of Free Cash Flow
Free cash flow (Free Cash Flow method) is an important measurement for
shareholders. The cash that remains after the payment of all cash expenses
and operating investment required by the firm. It is the money that is available
to pay the company's various claim holders, in particular the shareholders.
Book: S. David
Young, Stephen F. O'Byrne - EVA and Value-Based Management: A Practical Guide..
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Alternate Way to Find Free Cash Flow
A simpler method to extract the Free Cash Flow is to derive it from the firm's Statement of Cash Flow. Using Total Cash from Operations and subtracting Cap Ex and Dividends....
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Corporate Valuation for Businesses Corporate Valuation, Book Value, Market Value, Intrinsic Value, Fundamental Value, M&A, VBM, Fundamental Investing
Presentation that elaborates on corporate valuation, including the following sections:
1. Three types of value:
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Construction of Free Cash Flows (2) Calculating Free CF
Second part of Pedagogical Note by Ignacioa Velez-Pareja....
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Construction of Free Cash Flows Calculating Free CF
Pedagogical Note by Ignacioa Velez-Pareja. Usually a great deal of effort is devoted in typical financial textbooks to t...
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Buying the Asset versus Buying the Cash Flows Understanding the Difference BetweenBuying the Asset versus Buying the Cash Flow
In this video Stephen Yacktman explains that you can buy an asset:
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Compare with: Discounted Cash Flow (DCF)
| Internal Rate of Return (IRR) |
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Cost-Benefit Analysis
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