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Understanding Free Cash Flow Forecasting and Valuation Techniques

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This guide provides insights on Free Cash Flow (FCF), its significance in financial analysis, and the distinction between net income and FCF. Learn about forecasting methods for FCF, the importance of explicit and terminal periods, and how to apply discount rates to account for the time value of money. Additionally, we cover the computation of the Weighted Average Cost of Capital (WACC), including the Cost of Equity and Cost of Debt, and their role in determining Enterprise Value. Gain a comprehensive understanding of these critical financial concepts.

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Understanding Free Cash Flow Forecasting and Valuation Techniques

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Presentation Transcript

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    2. Introduction

    3. How will we do this?

    4. How will we do this?

    5. Free Cash Flow

    6. Free Cash Flow

    7. Net Income vs. Free Cash Flow

    8. Forecasting Free Cash Flow

    9. Forecasting Free Cash Flow

    10. Forecasting Free Cash Flow

    11. Explicit Period vs. Terminal Period

    12. Discount Rate Use a discount rate to apply time value of money A dollar tomorrow isnt worth as much as a dollar today Discount rate you choose is directly related to risk level of the company Reflects the required rate of return Weighted Average Cost of Capital Made up of Cost of Debt and Cost of Equity

    13. Cost of Equity Capital Asset Pricing Model (CAPM) Risk free rate + Risk Premium Risk free rate Use 10 year government bond yield to maturity for the country where the majority of the cash flow occur If uncertain, use US Treasury rates Risk Premium Beta*(Market return Risk free rate) Beta: how volatile is the companys stock in comparison to the overall market?

    14. Cost of Debt

    15. Weight of Debt and Equity The weights in WACC should reflect the target capital structure The weights in WACC should be calculated based on market value of equity and debt Multiply the cost of debt and cost of equity to their respective weights

    16. Enterprise Value

    17. Enterprise Value

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