Question

What is the 4 step process to estimate Cash Flows?

Before answering these questions please watch the 3 Damodaran Videos and answer the following question. Estimating Cash Flows

Answer 1

Step 1 : estimate the projected earning a company will make in the future by taking into consideration the earning made by the company today by using the most updated numbers available of the company.

Step 2: Since valuation is done on the basis of after tax cash flows the effect of taxes has to be considered.

Step 3 : out the estimated earning how much of that earning is going to be reinvested into the company on the basis of long term assets and short term assets.

Step 4 : Cash flow to/from debt holders should be considered to compute FCFE and FCFF which is ultimately used to value the company.