Skip to main content

Company Valuation - Free Cash Flow (FCFF) Method


One of the methods of valuing a company based on Discounted Cash Flow Method is as follows:

Value of the Company = Free Cash Flow for the Firm (FCFF) for next year / (Cost of Capital - Growth Rate)

where:

FCFF = EBIT next year x (1 - Tax Rate) x (1 - Reinvestment Rate)

Cost of Capital is the Weighted Average Cost of Capital (WACC)
i.e. Weight of Debt (Wd) x Cost of Debt (Kd) + Weight of Equity (We) x Cost of Equity (Ke)

Reinvestment Rate represents the amount required to be invested in the company every year to keep the company looking good and working well, even if the company does not grow in size.
Reinvestment Rate is calculated as Expected Growth rate (g) / Cost of Capital (Kc)

Note this is a simplistic method of calculation and is just one of the many ways of calculating value of a company. The method assumes that the company is growing at a constant growth rate which may not be a fair assumption to make, especially in case of start-ups or companies undergoing change in their life cycle stage.

Labels:

Comments

Post a Comment

Popular posts from this blog

CA Info - industrial training

Hi Friends, Here is the list of approved insitutions eligible for imparting Industrial training Approved Organisations - Eastern Region SIEMENS LIMITED 43 SHANTI PALLY E.M.BY PASS CALCUTTA 700042 CITI BANK N.A. TATA CENTRE 41,CHOWRINGHEE ROAD CALCUTTA 700071 RECKITT & COLMAN OF INDIA LTD 41,CHOWRINGHEE ROAD CALCUTTA 700071 BRITANIA INDUSTRIES LTD . 14, TARATALA ROAD CALCUTTA 700088 ICI INDIA LTD 34, CHOWRINGHEE ROAD CALCUTTA 700071 GRASIM INDUSTRIES LTD. INDUSTRY HOUSE 14TH FLOOR, 10, CAMAC STREET KOLKATA 700017 AMERICAN EXPRESS BANK 21, OLD COURT HOUSE STREET CALCUTTA 700001 BALMER LAWRIE CO. LTD 21, NETAJI SUBHAS ROAD CALCUTTA 700001 INDIAN OIL CORPORATION LIMITED 2,GARIAHAT ROAD(S) DHAKURIA CALCUTTA 700068 SRF LIMITED EXPRESS BUILDING 1ST FLOOR BAHADUR SHAH ZAFAR MARG NEW DELHI 110002 INDIAN RAYON AND INDUSTRIES LTD RISHRA HOOGHLY 712249 PEPSI-COLA INDIA MARKETING COMPANY SREE MANJURI BLDG. SUITE NO.6 , 1ST FLOOR 8/1, MIDDLETON ROW CALCUTT...
116 comments
Read more

Economic Survey 2013 Highlights

Chief Economic Advisor Raghuram Rajan tabled his first ever Economic Survey. Key features of the Survey are: GDP growth for 2012-13 is expected at 5% GDP growth for 2013-14 is expected at 6.1% to 6.7% The Average WPI Inflation has come down from 8.9% in 2011-12 to 7.6% in 2012-13 The Average CPI Inflation has increased from 8.4% in 2011-12 to 10.0% in 2012-13 Gross Fiscal Deficit has come down from 5.7% of GDP to 5.1% of GDP Revenue Deficit has come down from 4.3% of GDP to 3.5% of GDP The trade deficit increased to US$ 189.8 billion (10.2 per cent of GDP) in 2011-12 as compared to US$ 127.3 billion (7.4 per cent of GDP) during 2010-11. Current account deficit seen at 4.6% for 2013-14 Overall global economic environment remains fragile Gold imports is key contributor to inflation, imports need to be curbed LPG and Diesel prices need to be increased in line with global rates, oil subsidy is a key risk
1 comment
Read more

Why is Rupee depreciating then?

The US Economy is weakening, why is Rupee depreciating (as compared to dollar) then? The rupee slumped to a five-year low of 47.10 in spite of the slowdown in the US Economy. Ideally when a country is in the slowdown the currency of that country should depreciate. Fine that India is slowing down too but is still growing at a rate more than the US. But why is the Rupee depreciating then. There is heavy dollar-demand from oil refiners and importers. Sentiment for the local currency was further dampened by losses on the stock markets on Monday (29-Sep-08). But the central bank intervened by selling up to $1 billion which helped prop up the rupee. We have the inflation climbing the ladder very fast with remote signs of coming down. The crude oil prices are extremely volatile. The GDP forecast is also trimmed every now and then. The current account deficit is widening. With not many positives in sight, traders see the rupee trading in the 47-per dollar range for the next few days. At the cu...
Post a Comment
Read more