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.© BrainMass Inc. brainmass.com July 23, 2018, 5:38 am ad1c9bdddf
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:
= Earnings before Interest, taxes, depreciation and amortization
-Depreciation & Amortization
=Earnings before Interest and taxes
= Net operation profit after tax
+Add back depreciation and amortization
-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.
Adjusted present ...
The free cash flow model, adjusted present value model, and residual income model are discussed in this solution in 768 words with many references.