Week One Discussion

In: Business and Management

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What is free cash flow and how do I calculate it?
A summary provided by
Pamela Peterson Drake, Florida Atlantic University
CONTENTS:
Estimates of cash flows .................................................................................................................... 1
Free cash flow ................................................................................................................................. 2
Free cash flow and agency theory .................................................................................................. 3
Free cash flow to equity ................................................................................................................ 3
Free cash flow to the firm.............................................................................................................. 3
Valuation using free cash flow........................................................................................................... 4
Example.......................................................................................................................................... 5
Issues............................................................................................................................................. 6
Online resources for additional information on free cash flow............................................................... 6

The value of a company requires estimating future cash flows to providers of capital and capitalizing these to determine a value of the company today. But what are these cash flows and how do we estimate them?

Estimates of cash flows
Cash flows have been estimated a number of ways, which adds to the confusion about how we should value a company. Consider the simplest form of cash flow, which is the earnings before depreciation and amortization, EBDA. This cash flow is…...

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