PDF Notes: FINM372+Valuations+Free+Cash+Flow+to+Firm+Part+1 (1)

What is the principle behind free cash flow valuation?

Calculating the present value of an entity's cash flows.

How do risk and return affect valuations?

Higher risk typically requires a higher return to justify investment.

What is the required rate of return?

The minimum return investors expect for taking on risk.

How is the value of debentures determined?

Using the discounted cash flow technique.

What method values ordinary equity using future dividends?

The dividend growth model.

What does the free cash flow model focus on?

Key drivers of value and company operations.

What is the first step in the free cash flow model method?

Calculate free cash flows during the explicit period.

What is the terminal value in free cash flow valuation?

The estimated value at the end of the explicit period.

How is the present value calculated in free cash flow valuation?

Using the WACC as the discount rate.

What is subtracted to find the value of equity?

The present value of debt at the valuation date.

What is added to the value of equity in the free cash flow model?

The present value of non-operating, fixed assets.

What distinguishes free cash flow to firm from free cash flow to equity?

The former discounts cash flows available to the entire firm.

What principles are applied in asset valuation?

Risk and return significantly influence asset valuations.

How do you determine the required rate of return?

It reflects the compensation investors expect for taking on risk.

What is the discounted cash flow technique used for?

Valuing debentures, bonds, and preference shares.

What models are used to value ordinary equity?

Includes dividend growth, free cash flow, price multiples, and asset value.

What does the free cash flow valuation method calculate?

The present value of an entity's cash flows.

What is the difference between free cash flow to firm and free cash flow to equity?

The former focuses on cash flows available to the firm, while the latter is for shareholders.

What is the first step in the free cash flow model method?

Calculate free cash flows during the explicit period.

What is the terminal value in the free cash flow model?

It represents the value at the end of the explicit forecast period.

How is the present value calculated in the free cash flow model?

Using the WACC as the discount rate for cash flows and terminal value.

What do you subtract to find the value of equity in the free cash flow model?

The present value of debt at the valuation date.

What principles are applied in asset valuation?

Risk and return significantly influence asset valuations.

How do you determine the required rate of return?

It reflects the compensation for risk taken by investors.

What is the discounted cash flow technique used for?

Valuing debentures, bonds, and preference shares.

What models are used to value ordinary equity?

Includes dividend growth, free cash flow, price multiples, and asset value.

What does the free cash flow valuation method calculate?

The present value of an entity's cash flows.

What is the difference between free cash flow to firm and free cash flow to equity?

The former focuses on cash flows available to the firm, while the latter is for shareholders.

What is the first step in the free cash flow model method?

Calculate free cash flows during the explicit period.

What is the purpose of calculating the terminal value?

To estimate the value at the end of the explicit period.

How is the present value calculated in the free cash flow model?

Using the WACC as the discount rate.

What do you subtract to find the value of equity in the free cash flow model?

The present value of debt at the valuation date.