The Fcf-Based Valuation Model

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CONTENT 1. Derive the FCF-based valuation model 2 1)Present value of FCF-based valuation (FCFF) 2 2)Present value of FCFE 2 2. Compare and contrast the FCF-based valuation with the dividend discount model 6 1) Similar between FCF-based valuation (FCFE) and DDM 6 2) Difference between FCF-based valuation and DDM 7 3. Identify & suggest remedies to some of the biggest limitations of a FCF-based valuation model 9 Bibliography 11 1. Derive the FCF-based valuation model Free cash flow indicates a cash flow which generate by the core activities of company after the deduction of investment capital. It’s a completely accurate measure of outstanding achievement and financial position in theory. Free cash flow reflects the residual cash after maintain within firm or expenditure in asset. According to Investopedia (n.d.) free cash flow presents the cash which a company could use after tax, capital and working capital expenditure. At the FCF-based valuation model, there are two main models. One is FCFE (Free Cash Flow to equity) and another one is FCFF (Free Cash Flow for Firm). The difference between FCFE and FCFF is that the former regards as the largest free cash arranged by shareholders of the firms, the latter refers to the largest allocable free cash of shareholders and debt holders of the firms. Hence, FCFE is equal to the deduction of allocable free cash of debt holders upon FCFF. 1)Present value of FCF-based valuation (FCFF) Under this model, the future free cash flow is defined that amount of cash flow for equity holders and debt holders after expense and investment. The formula can be described like that: FCFF = EBIT (1- t) + Depreciation– Change Net Working Capital– Capital Expenditure Where, EBIT = Earnings before income and tax, t = Tax rates 2)Present value of FCFE Under this model, the future free cash flow is defined that amount of

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