Prof.

Harnesh Makhija
 Discounted Cash Flow
 Price Multiples
 Valuation of Brands
 Calculating FCFF
 Calculating PV of FCFF
 Calculate Terminal Value
 Calculate PV of Terminal Value
 Calculating Value of Business
“Free cash flow to the firm is the cash flow available to the company’s
supplier of capital after all operating expenses (Including Taxes) have
been paid and necessary investment in working capital (e.g. Inventory)
and Fixed Assets have been made.”
Particulars Amount
Net Income available to equity shareholders (PAT) XXXX
(+) Non cash charges (Depreciation/Amortization) XXXX
(+) Interest Expenses x (1 – Tax Rate) XXXX
(-) Investment in fixed assets XXXX
(-) Investment in working capital XXXX
FCFF XXXX

This equation can be written more compactly as:

FCFF = NI + NCC + Int(1 - Tax rate) - FCInv - WCInv

 The non cash charges reduces net income but
is not a cash outflow at the time of purchase.
Non Cash Items Adjustments to NI to
arrive FCFF
Depreciation Added Back
Amortization Added Back
Restructuring charges (expense) Added Back
Restructuring charges (income) Subtracted
Losses Added Back
Gains Subtracted
 This step is required because interest
expenses net of the related tax savings was
deducted in arriving at net income, and
because interest is cash flow available to one
of the company’s capital providers.
 It represent the outflow of cash necessary to
support the company’s current and future
operations.
 The company’s cash flow statement is an
excellent source of information on capital
expenditures as well as sales of fixed assets.
 This adjustment represents the net
investment in current assets, such as
accounts receivables, less current liabilities
such as accounts payable.
 Analysts can find this information by
examining either the company’s balance
sheet or the cash flow statement.
Particulars 2001 2002 2003
Net Income available to equity shareholders (PAT/RE) 97.52 107.28 118.00
(+) Non cash charges (Depreciation/Amortization) 45 49.50 54.45
(+) Interest Expenses x (1 – Tax Rate) 10.98 12.08 13.28
(-) Investment in fixed assets 0.00 (50.00) (55.00)
(-) Investment in working capital (56.00) (11.60) (12.76)
FCFF 97.50 107.26 117.97
Particulars Amount
Cash flow from operations XXXX
Plus: Interest expenses (1 – Tax Rate) XXXX
Less: Investment in fixed assets XXXX
FCFF XXXX
Particulars 2001 2002 2003
Cash flow from operations 86.52 145.18 159.69
Plus: Interest expenses (1 – Tax Rate) 10.98 12.08 13.28
Less: Investment in fixed assets 0.00 (50) (55)
FCFF 97.50 107.26 117.97
“Free cash flow to equity is the cash flow available to the company’s
common equity holders after all operating expenses, interest and
principal payments have been paid and necessary investment in working
capital and fixed capital have been made.”
Particulars Amount
Free cash flow to the Firm (FCFF) XXXX
Less: Interest expenses (1 – Tax Rate) XXXX
Plus: Net Borrowings XXXX
FCFE XXXX
Particulars 2001 2002 2003
FCFF 97.50 107.26 117.97
Less: Interest expenses (1 – Tax Rate) (10.98) (12.08) (13.28)
Plus: New debt borrowing 22.40 24.64 27.10
FCFE 108.92 119.82 131.79
Particulars Amount
Net Income available to equity shareholders (PAT) 240
(+) Non cash charges (Depreciation/Amortization) 300
(+) Interest Expenses x (1 – Tax Rate) 60
(-) Investment in fixed assets (400)
(-) Investment in working capital (45)
FCFF 155
Particulars Amount
Free cash flow to the Firm (FCFF) 155
Less: Interest expenses (1 – Tax Rate) (60)
Plus: Net Borrowings 75
FCFE 170
Particulars Amount
Net Income available to equity shareholders (PAT) 240
(+) Non cash charges (Depreciation/Amortization) 300
(-) Investment in fixed assets (400)
(-) Investment in working capital (45)
(+) Net Borrowings 75
FCFF $170
Particulars Amount
Cash flow from operations 495
Plus: Interest expenses (1 – Tax Rate) 60
Less: Investment in fixed assets (400)
FCFF 155
Particulars Amount
Cash flow from operations 495
Less: Investment in fixed assets (400)
Plus: Net Borrowing 75
FCFE 170
Particulars Amount
EBIT (1 – Tax Rate) = 500 (1-0.40) 300
(+) Non cash charges (Depreciation/Amortization) 300
(-) Investment in fixed assets (400)
(-) Investment in working capital (45)
FCFF 155

Particulars Amount
FCFF 155
(-) Interest = 100(1-0.40) (60)
(+) Net Borrowings 75
FCFE 170
Particulars Amount
EBITDA (1 – Tax Rate) = 800 (1-0.40) 480
(+) Depreciation= 300(0.40) 120
(-) Investment in fixed assets (400)
(-) Investment in working capital (45)
FCFF 155
Value of Firm = P.V of FCFF in Explicit Forecast
Period + P.V of Terminal Value