Free Cash Flow Valuation
Overview
Free cash flow valuations are a type of present value (discounted) calculation that uses
free cash flows as the cash flow stream that is discounted to arrive at a value.
The basic equation of discounted value is based on
a
present value
calculation.
{% Value = \sum_t \frac{Cash \, Flow_t}{(1+r)^t} %}
Owners of the Firm
For te purposes of capital structure, the definition of owners of the firm is broadened beyond the shareholders to mean
the owneres of the firms cash flows. Alternatively, that means any provider of capital to the firm is an owner in
some sense.
Under this definition, the value of a firm is divided between the owners of debt, and the owners of equity.
The total value is the sum of these two.
{% Value = Debt + Equity %}
Free Cash Flow Definitions
Free cash flows are actual cash flows that can be directed to the owners of the firm (as defined above).
They are actual in the sense that they represent actual cash, as opposed to income or expense that is
recognized on the books without having actually exchanged money.
There are essentially two commonly used defintions of cash flow, that mirror
the
capital structure
of the firm.
Forecasting Free Cash Flow
