FINA 365 Lecture Notes - Lecture 8: Cash Flow, Valuation Using Multiples

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If you build greater flexibility into the project, you will increase its npv. Delay: choose if it enhances npv, can add value if expect price to fall. Expand: start with limited production and expand if launch is successful. Discounted free cash flow model: focuses on cash flows to all investors (debt and equity holders) Enterprise value (v0): value of firm"s underlying business, unencumbered by debt or cash. Ev = market value of equity (market cap) + debt - cash. Can value a firm without forecasting its dividends, share repurchases, or use of debt. Compute present value of firm"s free cash flow. Free cash flow = ebit*(1-tax rate) + depreciation - capital expenditures - increases in net working capital. Fcf measure cash generated by the firm before any payments to debt or equity holders. Use rwacc, weighted average cost of capital as the rate of return. If firm has no debt, re = rwacc.

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