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theory and in practice Unlevered vs. levered DCF SECTION 2: MODELING THE DCF Modeling unlevered free cash flows Discounting to reflect stub year and mid-year adjustment Terminal value using growth in perpetuity approach Terminal value using exit multiple approach Calculating net debt Shares outstanding using the treasury stock method Modeling the weighted average cost of capital (WACC) Sensitivity analysis using data tables Modeling synergies ***************************** SAMPLE PAGES FROM TUTORIAL
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Weighted Average Cost of Capital (WACC) Calculations The weighted average cost of capital (WACC) is the discount rate used in the discounted cash flow analysis. Usually‚ the WACC is the weighted average of the cost of debt (Kd) and the cost of equity (Ke)‚ since debt and equity are the most common sources of funds for the companies. In general‚ the formula for WACC is the following: As implied by the formula itself‚ if a company does not have interest-bearing debts‚ then its WACC would equal
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Larisa Warren‚ the owner of East Coast Yachts‚ has decided to expand her operations. She asked her newly hired financial analyst‚ Dan Ervin‚ to enlist an underwriter to help sell $30 million in new 20-year bonds to finance new construction. Dan has entered into discussions with Robin Perry‚ an underwriter from the firm of Crowe & Mallard‚ about which bond features East Coast Yachts should consider and also what coupon rate the issue will likely have. Although Dan is aware of bond features‚ he
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Ratio Analysis and Statement of Cash Flows Financial ratios are "just a convenient way to summarize large quantities of financial data and to compare firms’ performance" (Brealey & Myer & Marcus‚ 2003‚ p. 450). Financial ratios are very useful tools in order to determine the health of a company‚ help managers to make decision‚ and help to compare companies that belong to the same industry in order to know about their performance. Home Depot and Lowe’s are two home improvement chains in the United
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Task 1: Observe your community I live in Pointe d’esny‚ Mahebourg‚ a small town on the south east coast of Mauritius. Most days I go into Mahebourg and people are always chatting to one another‚ bike riding between shops and houses ‚ walking with dogs‚ fishing in the sea or just relaxing under a tree alongside the road. Every afternoon there are school children walking home or playing in the streets‚ laughing and having fun. Many of the men are fishing or coming home after a long day of fishing
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Difference Between Cash Flow and Funds Flow Statement Many people think that both cash and fund are same‚ however they both are different and so is the case with cash flow statement and funds flow statement. Let’s look at some of the differences between cash flow and funds flow statement – 1. While funds flow statement reveals the change in the working capital of a company between two balance sheet dates while cash flow statement reveals the change in the cash position of the company between two
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preparing a statement of cash flows‚ the term cash is broadly defined to include both cash and cash equivalents. Cash comprises cash on hand and demand deposit with banks. Cash equivalents consist of short term‚ highly liquid investments such as treasury bills‚ commercial paper‚ and money market funds. Such investments are made solely for the purpose of generating a return on funds that are temporary idle. Instead of simply holding cash‚ most companies invest their excess cash reserves in these types
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Explain. Our basic principle of stock valuation is that the value of a share of stock is simply equal to the present value of all of the expected dividends on the stock. According to the dividend growth model‚ an asset that has no expected cash flows has a value of zero‚ so if investors are willing to purchase shares of stock in firms that pay no dividends‚ they evidently expect that the firms will begin paying dividends at some point in the future. 2. Explain why some bond investors are
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CONSTRUCTION OF FREE CASH FLOWS A PEDAGOGICAL NOTE. PART I Ignacio Vélez-Pareja ivelez@javeriana.edu.co Department of Management Universidad Javeriana Bogotá‚ Colombia Working Paper N 5 First version: 5-Nov-99 This version: January 2001 This paper can be downloaded from the Social Science Research Network Electronic Paper Collection: http://papers.ssrn.com/paper.taf?abstract_id=196588 CONSTRUCTION OF FREE CASH FLOWS
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