Discounted cash flow, residual income, market-based valuation, private company valuation and industry analysis.
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- What is free cash flow to firm (FCFF) in DCF valuation?
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Cash available to all investors (debt and equity holders) after taxes and capital reinvestment, before financing decisions.- What is free cash flow to equity (FCFE)?
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Cash available to equity holders after debt service and capital expenditures, before paying dividends.- What is terminal value in discounted cash flow valuation?
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The estimated value of the firm at the end of the explicit forecast period, assuming a stable perpetual growth rate.- What discount rate is used in FCFF valuation?
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Weighted average cost of capital (WACC), which reflects the weighted cost of all financing sources.- When is a two-stage DCF model used?
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When a company has one explicit forecast period with different growth assumptions than a subsequent stable growth period.- What is perpetuity growth rate in terminal value?
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The constant rate at which cash flows are assumed to grow indefinitely after the forecast period.- What formula calculates FCFF from net income?
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FCFF = Net Income + Interest(1-Tax Rate) + Depreciation - Capital Expenditures - Change in Net Working Capital.- How do FCFF and FCFE relate to each other?
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FCFE = FCFF - Interest(1-Tax Rate) - Debt Repayments + Net Borrowing.- What is the dividend discount model (DDM)?
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A valuation method that values equity as the present value of all future dividend payments.- If perpetuity growth rate increases in a DCF model, what happens to firm value?
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Firm value increases, because terminal value (and total value) rises with higher expected growth.- Define residual income in equity valuation.
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Net income minus a charge for the cost of equity capital (Residual Income = Net Income - Equity Charge).- What is the clean surplus relation?
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Ending book value equals beginning book value plus net income minus dividends paid.- What is the role of book value in residual income valuation?
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Book value is the starting point; intrinsic value equals book value plus the present value of expected residual income.- What is economic profit in the context of residual income?
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Operating profit after tax (NOPAT) minus the cost of capital applied to invested capital.- How does the residual income model treat dividends?
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Dividends are irrelevant to valuation; only earnings (net income) matter, regardless of payout ratio.
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