BMGT 340 Lecture Notes - Lecture 12: Cash Flow, Capital Budgeting, Net Present Value
Chapter 10 Stock Valuation Video
• Capital budgeting
o The allocation of funds to long term projects
o The meat of the firm
o The NPV is the best method for making decisions on capital budgeting
o Accuracy of the NPV depends on the accuracy of the estimation of the
cash flows
• Discounted Free Cash Flow Model
o Discounted Free Cash Flow Model focuses on the cash flows to all of
the firm’s investors, both debt and equity holders
o EV = MV of equity + Debt – Cash
o Valuing the Enterprise
▪ To estimate a firm’s enterprise value, we compute the present
value of the firm’s free cash flow available to pay all investors
▪ Free Cash Flow = EBIT (1-TaxRate) + Depreciation – Capital
Expenditures – Increasing NWC
▪ V0 = PV (Future Free Cash Flow of Firm)
▪ Given the enterprise value we can estimate the share price to
solve for the value of equity and then divide the total number
of shares outstanding
▪ P0 = (V0 + Cash – Debt) / Shares Outstanding
• Connection to Capital Budgeting
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