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In chapter 3, we used dividends as the measure of shareholder cash flow in stock valuation. In chapter 4, we will utilize free cash flow. Whereas dividends are the cash flow actually paid to shareholders, free cash flow (FCF) is the cash flow available to shareholders. | Free Cash Flow Valuation Presenter Venue Date 1 In Chapter 3, we used dividends as the measure of shareholder cash flow in stock valuation. In Chapter 4, we will utilize free cash flow. Whereas dividends are the cash flow actually paid to shareholders, free cash flow (FCF) is the cash flow available to shareholders. Unlike dividends, data on free cash flows are not readily available. Stock analysts must interpret financial statements to determine free cash flows. Although free cash flow analysis can prove quite challenging, many analysts consider free cash flow models more relevant than dividend discount models. In this chapter, we begin by examining two definitions of free cash flow. We then discuss the determination of free cash flows so that they can be used in valuation models. We will use models similar to dividend discount models (DDMs) such as the stable-growth model, two-stage model, and three-stage model. DISCLAIMER: This presentation is NOT a substitute for the CFA Program | Free Cash Flow Valuation Presenter Venue Date 1 In Chapter 3, we used dividends as the measure of shareholder cash flow in stock valuation. In Chapter 4, we will utilize free cash flow. Whereas dividends are the cash flow actually paid to shareholders, free cash flow (FCF) is the cash flow available to shareholders. Unlike dividends, data on free cash flows are not readily available. Stock analysts must interpret financial statements to determine free cash flows. Although free cash flow analysis can prove quite challenging, many analysts consider free cash flow models more relevant than dividend discount models. In this chapter, we begin by examining two definitions of free cash flow. We then discuss the determination of free cash flows so that they can be used in valuation models. We will use models similar to dividend discount models (DDMs) such as the stable-growth model, two-stage model, and three-stage model. DISCLAIMER: This presentation is NOT a substitute for the CFA Program curriculum. Candidates should not view this material as reflecting what will be required of them on the CFA exam. Free Cash Flow LOS: Define and interpret free cash flow to the firm (FCFF) and free cash flow to equity (FCFE). Page 147 Free cash flow to the firm (FCFF) is the cash flow available to all the firm’s suppliers of capital once the firm pays all operating expenses (including taxes) and expenditures needed to sustain the firm’s productive capacity. The expenditures include what is needed to purchase fixed assets and working capital, such as inventory. The firm’s suppliers of capital include common stockholders, bondholders, and preferred stockholders (if the firm has preferred stock outstanding). Free cash flow to equity (FCFE) is the cash flow available to the firm’s common stockholders once operating expenses (including taxes), expenditures needed to sustain the firm’s productive capacity, and payments to (and receipts from) debtholders are accounted for. Note that the cash
