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Cash Flow Valuation Model

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Discuss the free cash flow model, the adjusted present value model, and the residual income model.

Provide an example of a situation where each model would be applicable. IN 4-5 paragraphs

Objective is to discuss the concepts and methods underlying the valuation of companies, including both profitability and risk analysis.

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Solution Summary

The free cash flow model, adjusted present value model, and residual income model are discussed in this solution in 768 words with many references.

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Free cash flow model:

The Free Cash Flow DCF Model takes consideration of discounting dividend cash flows, the free cash flow model discounts the total cash flows that would flow to the suppliers of the firm's capital. Once the present value of those cash flows are determined, liabilities and preferred stock (if any) are subtracted to arrive at the present value of common stockholders' equity.

Free cash flows to investors (debt and equity) are calculated as follows:

Cash Revenue
-Cash Expenses
= Earnings before Interest, taxes, depreciation and amortization
-Depreciation & Amortization
=Earnings before Interest and taxes
-Taxes
= Net operation profit after tax
+Add back depreciation and amortization
-Capital Expenditures
-New Net working capital
= Free Cash Flow

Free cash flow represents those amounts in each operating period that are "free" to be distributed to the suppliers of the firm's capital, that is, the debt holders, the preferred stockholders, and the common stockholders

Example/Appropriate scenario: Unquoted firms (those firms which have are not listed in the stock exchange market) can be done by the use of Free Cash flow discount model.

source: http://cbdd.wsu.edu/kewlcontent/cdoutput/TR505r/page23.htm

Adjusted present ...

Solution provided by:
Sandeep Bardia, MBA
Education
  • BCom, SGTB Khalsa College, University of Delhi
  • MBA, Rochester Institute of Technology
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