We value the firm as is, w/o interest or dividends or principal.
Interest expense is not a cost, it’s part of the vlaue that goes to the bank… (that’s hard for me to understand) Assets goes to equity holders and bond holders.
FCF = revenues - costs - investments - taxes
Another way to say that is EBIAT + depreciation - investments
- Taxes = Corporate tax rate * (revenues - costs - depreciation)
- Because we get to deduct depreciation
- And we would factor out revenues - costs
- The taxes I will have to pay if we had no debt
- Investments = CAPEX + Delta of NWC
- CAPEX: How much we plan to spend in the future, capex comes from the cash flow statement. Longterm investment
- Delta of NWC: Need to know the flow of the working capital, and find the difference between them. Working capital comes form the balance sheet and you need to turn the static into dynamic, from a stock into a flow. Short term investment.
- Wants to know how much I had to add to net working capital
- AR + Inventory - AP for one year
- You star tw/ the previous years Net working capital and then evaluate the next year
Terminal Value
Growing perpetuity (Exponential decay, time value of money)
- A perpetuity PV = c/r, and a growing perpetuity is PV = CV / r-g
- C = Payment
- r = the interest rate
- g = growth rate
Finance is about two human traits: 1.) We’re impatient and 2.) We’re risk averse
Incremental cash flows: costs that can’t be avoided irrespective of your decision.
The costs can’t become sunk. They’ve either been invested or they will be.
Inflation
- Nominal - unadjusted
- Real - adjusted for inflation
WACC reminder
- On a blance sheet ew have assest snad libaiblities. For liabilities we have debt and equity
- Weighted average cost of capital
- What are the weights? Debt and equity, and their proportions are your weights.
- My rd is reduced thanks to my tax shield.
- Tax shield, when you tax more debt, you pay less taxes.
- If I have more leverage, then my WACC should go down, and my valuation should go up.
- Toi find my re,
- CAPM
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