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The Free Cash & Capital Flows prepared to calculate Enterprise Value, when using the Discounted Cash...

The Free Cash & Capital Flows prepared to calculate Enterprise Value, when using the Discounted Cash Flow (DCF) method of valuing a firm, does not include changes in working capital. True or False

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Expert Solution

False

Free Cash Flow

Free cash flow is a measure of a company’s financial performance. It represents how much cash a company has left from its operations – cash that could be used to pursue opportunities that improve shareholder value, including acquisitions, new product development, debt reduction and paying dividends to investors. We compute free cash flow by figuring out what’s left over from revenues after deducting operating costs, taxes, net investment and the working capital requirements.

In the DCF method, change in working capital would exclude change in cash, cash equivalents and current financial debt, and include "non financial" items such as change in inventories, receivables, payables.

The DCF calculation would give you Enterprise Value, to which you would then, in order to get Equity value:

- add cash & equivalents (portion not trapped) and non operating assets

- deduct financial debt and debt-like items (portion not already accounted for in the cash flows).

Thanks

jeff jeffy answered 2 years ago
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