operating cash flows over the projects life. It includes the up-front cost of fixed assets associated with the project plus any increase in net working capital. ![]() Shareholders need to be compensated for the risk their capital is taking on and the residual income is what is left over after taking this into account. A terminal value needs to be calculated when a stable growth rate is expected. Cash Flow Projections PDF Download The incremental cash flows from a typical project can be classified into three categories: initial investment outlay. What is Residual Income Residual income is the amount of earnings left over after paying for the opportunity cost of equity capital (also referred to as equity charge). CFA Level II carpediem06June 5, 2009, 10:19pm 1 I don’t feel like digging through the books. The discount rate should be the companys WACC. Other issues with free cash flow analysisĬompare the FCFE model and dividend discount models Įxplain how dividends, share repurchases, share issues, and changes in leverage may affect future FCFF and FCFE Įvaluate the use of net income and EBITDA as proxies for cash flow in valuation Įxplain the single-stage (stable-growth), two-stage, and three-stage FCFF and FCFE models and select and justify the selection of the appropriate model given a company's characteristics Įstimate a company's value using the appropriate free cash flow model(s) Įxplain the use of sensitivity analysis in FCFF and FCFE valuations Įvaluate whether a stock is overvalued, fairly valued, or undervalued based on a free cash flow valuation model. Understanding and Analyzing Cash Flow Statements CFA Level I FSA Sources and Uses of Cash Calculating and Analyzing Free Cash Flow (FCF) More videos on. Free Cash Flow Method The method is similar for private and public companies: project the future free cash flows and discount them to present dollars to estimate their present value. 2023 Curriculum CFA Program Level II Equity Investments Free Cash Flow Valuation Download the full reading (PDF) Available to members Introduction Discounted cash flow (DCF) valuation views the intrinsic value of a security as the present value of its expected future cash flows. ![]() ![]() Computing FCFF and FCFE from net income, EBIT, EBITDA, or CFOĮxplain the appropriate adjustments to net income, earnings before interest and taxes (EBIT), earnings before interest, taxes, depreciation, and amortization (EBITDA), and cash flow from operations (CFO) to calculate FCFF and FCFE ĭescribe approaches for forecasting FCFF and FCFE Ĥ. Compare the free cash flow to the firm (FCFF) and free cash flow to equity (FCFE) approaches to valuation Įxplain the ownership perspective implicit in the FCFE approach Ģ. 2 web show more this is reading 23 for the 2021 exam this cfa exam prep video lecture covers cash flow statement analysis free cash flow to firm and free.
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