Question

Explain how free cash flow is used to estimate the value of a firm or individual stock.

Answer #1

Answer :- Free cash flows of firm over the number of years in future are discounted with the cost of capital to arrive at the valuation of firm. Mathematically, Value of firm is calculated using the free cash flows in the following manner:-

**Value of firm = Expected free cash flows in future /
(Cost of capital - Growth in free cash flows).**

(Cost of capital is *Weighted average cost of capital here in
the above equation).*

Similarly, Value of individual stock can also be calculated
using the free cash flows **(in dividend form on
stock)** in the following manner :-

**Value of stock (Price of stock) = Expected dividend at
the year end / (Required return - Growth in
dividends)**.

(In the above equation, Required return in denominator portion
is the *Rate of return available to stockholder / Cost of equity
stock capital from company point of view)*

Stock valuation via free cash flow approach: Please explain how
to find the the intrinsic firm value, and then back out the
intrinsic stock value per share. I'm currently doing this for the
McDonalds stock

Briefly explain adjustments to free cash flow to the firm (FCF)
when computing free Cash flow to Equity (FCE)

How is Free Cash Flow computed and what does free cash flow
represent to the firm?

How do you estimate firm value when free cash flows of the firm
are uneven for the first few years but stay constant
thereafter?

Use the following information and a Free Cash Flow to the Firm
model to calculate the stock price for Andrews, Inc. Show your
work.
The free cash flow to the firm last
year was 900. The free cash flow is expected to grow at
a rate of 10 percent annually for the next two years and remain the
same thereafter.
CAPM Equity Return
0.130
WACC
0.065
Cash & Marketable Sec.
580
Market Value of Debt
12,000
Book Value of Debt...

How to forecast Free Cash Flow to Firm (FCFF)? Describe the
process.

The discounted free cash flow model indicates that the
true value of a firm todaydepends on...
A. The present value of all firms' debt
B. The future value of all firms' cash
flows
C. The present value of all future cash flows generated
by the firm's operations that are available to all
investors.
D. The future value of firm's stock prices
E. The market value added that the company generates
above its book value ad cost of capital

Blackbriar’s most recent free cash flow to the firm (FCFF) is
$5,000,000. The company’s target debt-to-equity ratio is 0.25. The
company has 2 million shares of common stock outstanding and the
market value of the firm’s debt is $10 million. The firm’s tax rate
is 40%, the cost of equity is 10%, the firm’s pre-tax cost of debt
is 8%, and the expected long-term growth rate in FCFF is 5%.
Estimate the equity value per share using a single-stage free...

Blackbriar’s most recent free cash flow to the firm (FCFF) is
$5,000,000. The company’s target debt-to-equity ratio is 0.25. The
company has 2 million shares of common stock outstanding and the
market value of the firm’s debt is $10 million. The firm’s tax rate
is 40%, the cost of equity is 10%, the firm’s pre-tax cost of debt
is 8%, and the expected long-term growth rate in FCFF is 5%.
Estimate the equity value per share using a single-stage free...

You must estimate the intrinsic value of Noe Technologies’
stock. The end-of-year free cash flow (FCF 1) is
expected to be $28.50 million, and it is expected to grow at a
constant rate of 7.0% a year thereafter. The company’s WACC is
10.0%, it has $125.0 million of long-term debt plus preferred stock
outstanding, and there are 15.0 million shares of common stock
outstanding. Assume the firm has zero non-operating assets. What is
the firm's estimated intrinsic value per share...

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