CashFlowfromAccountingNumbers.docVIP

Valuation Cash Flow A Teaching Note Cash Flow from Accounting Numbers Unfortunately the most valuable and reliable information about a firm(s cash flows is not often presented in the form of annual net cash flows to the firm. It comes in the form of income statements, balance sheets, and statements of cash flow. Here is a quick and somewhat rough explanation of how to get to where we need to be. We will consider the development of two separate (financial cash flow( figures, Capital Cash Flow (CCF) and Free Cash Flow (FCF). CCF is defined to be the after tax cash flow that is available to be returned to the contributors of capital (all security holders) after all valuable investments have been made. FCF is the after tax cash flow that would be available to be distributed after making all valuable investments if the firm were an all equity financed firm (i.e., not including any increase in cash derived from the use of debt financing). While FCF is a hypothetical value it is theoretically more correct to use it in valuation. We can develop both values in several ways. The easiest and most accurate is to start from net income. This uses the firm(s forecast of taxes and the value of the tax shields. This is usually better than our estimates of taxes would be. Net income (net earnings) includes any tax benefit from debt financing (debt tax shields) since interest is deducted before computing taxes. We will have to deal with this. Cash flow adjustments are made to NI. Depreciation, Amortization, and other noncash subtractions from NI are added back to it. Capital Expenditures are subtracted because these cash outflows do not appear on the income statement and so have not been subtracted from NI. Cap Ex is expenditures on new and replacement PPE, essentially the increase in net fixed assets plus depreciation expense. Technically this is Gross Cap Ex less the net book value of retired assets, but this is typically small. (Some instead use the increase in gros