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Topic: Free Cash flow. Is this the only thing?

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studentoflife
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Posted: 10/Feb/2010 at 1:26am

What is the suggested order of priority, sector wise for using cash flow techniques with reasons:

For example :

1) Pharma -

2) Healthcare

3) Hotel

etc..

Also which type of sectors cash flow is not so valuable:

For eg:

Retail : Cash flow frequency is high ,so difficult to manage. (Just guessing..

)

Edited by ramprakashs - 10/Feb/2010 at 1:29am

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dipoct
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Posted: 23/Dec/2010 at 11:17am

is this right basantji

Free Cash flow = Cash flow from operations + Net Capital Expenditure – Dividends paid (right?)

but tell me where will net capital expenditure figure in balance shhet and dividends in balance shhet

can you tell me where will i get this values in balance sheet

also can you share which is the best portal for stock analyses where free cash flowe and dcf value is readymade given so that we dont have to do calculations manually

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Midhun
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Posted: 27/Dec/2010 at 7:48am

Hi,
I have a question on calculating Terminal Value when the Discount rate is lesser than Long term growth rate.Can we still use DCF for such cases or should be use some other valuation model ?

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Midhun
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Posted: 27/Dec/2010 at 7:59am

FCF= EBIT(1-Tax Rate)-(Capex-Depreciation)-Change in workng capital.

You take the change in total assets and subtract them from the change in total liabilities, for example:
Say Company X has the current information on their balance sheet:
2009
Total Assets= 2000
Total Liabilities=1000
2010
Total Assets= 4000
Total Liabilities=2000
The change in assets is 2000 (4000-2000) and the change in liabilities is 1000 (2000-1000). Subtract the two and you get a CAPEX (capital expenditure) of $1000.

http://wiki.answers.com/Q/How_do_you_calculate_net_capital_expenditure

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dipoct
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Posted: 27/Dec/2010 at 9:12am

hi mithun

is this formula right too

Free Cash flow = Cash flow from operations + Net Capital Expenditure – Dividends paid (right?)

see yaar i am not from finance person so please explain me in simple terms

oes any inian bussiness site has free cash flow ready made so i dont have to do calculations

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trushik
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Posted: 27/Dec/2010 at 9:29am

Hi dipoct

By theory, you dont hav to deduct the Dividends... becoz it is a by definition:

Free cashflows are of two types FCF (firm) & FCF (equity)

FCF(firm) is the free cashflow available to the entire firm i.e. debt holders and equity holders. The cashflow is before any payment is made to any of the providers of capital (debt & equity). Dividends being a payment to equityholders we cannot reduce that as it is a part of the free cashflow available to the firm. (its just that the management decides to distribute that portion of free cashflow as dividend)

FCF(firm) = Cashflow from operations - Net Capex (Capex + Depreciation & Amortisation) which is same as [EBIT(1-tax)+D&A-Capex+/- change in working]

FCF (Equity) is the free cashflow available to just equity holders, after the debt holders are paid. Here we consider the free cashflow after the debtholders have been .i.e interest payment and principle repayment

FCF(equity) = PAT - Net Capex +/- Change in working capital - Net principal debt repayment

Hope this helps.

Regards,

Edited by trushik - 27/Dec/2010 at 9:33am

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trushik
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Posted: 27/Dec/2010 at 10:01am

Originally posted by Midhun

Hi,
I have a question on calculating Terminal Value when the Discount rate is lesser than Long term growth rate.Can we still use DCF for such cases or should be use some other valuation model ?

Discount rate (WACC) cannot be lesser than terminal growth rate practically... IN MY PERSONAL OPINION!

Because... WACC is weighted average cost of capital i.e. cost of debt and cost equities weighed average!

Now, if you think about cost of debt - it is the rate at which the company will be able to borrow money in future... i.e. the interest rate they pay will have to be higher than the long term inflation expected in the country (10 yr govt. bond yeild)...

hence, cost of debt is always > 10 yr govt bond yield

Similarly, Cost of equity is... risk free rate (Rf) + beta (equity risk premium.i.e Rm-Rf).... Rf is generally the 10 yr govt bond yield.... hence adding the multiple of Beta and ERP we will always get a higher value than Rf which is the 10yr govt bond yield...

even if you think about it logically... cost of equity is the returns expected by the equity holders of the company... this expected return on equity holding will always be higher than any debt holding generally.

hence, cost of equity also is always > 10 yr govt bond yield

And the discount rate (WACC) which is sum of both above....will be much higher than the 10yr govt bond yield....i.e. for india 7.8% approx is the 10 yr govt bond yield... discount rate for any company in india will be higher than 7.8%

Discount rate is always > 10 yr govt bond yield

Terminal growth rate is the growth rate at which company is expected to grow perpetually.... now a company cannot grow higher than the economy for a perpetual period of time... it has to grow at the economy growth rate or less... now if we consider india... it is growing at 8.5-9.0 % ... but is this growth sustainable perpetually....??

no country can grow at this rate forever! (may be for a few decades but not perpetually)... the country will reach a mature stage where it will only grow by about 4-5 %...

thus Terminal growth rate cannot be higher than 5%

To sum up, Terminal growth rate cannot be higher than 5% and Discount rate cannot be lower than 7.8% ... thus according to me... discount rate cannot be lesser than long term terminal growth rate...

This is my personal understanding and opinion which could be wrong....... kindly share any other views!

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dipoct
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Posted: 27/Dec/2010 at 10:06am

hi

if you have gmail id lets chat on this on gmail

my id is [email protected]

add me i am online

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