Total Cash Flow vs. Free Cash Flow to the Firm in DCF
In the DCF analysis, why do we use annual Free Cash Flow to the Firm (which only partially accounts for Investing activities and omits financing activities) to find the Enterprise Value, rather than total annual Cash Flow (Operating+Investing+Financing)?
You only want to account for items that impact cash on a recurring basis. Cash impacts from operations activities (net working capital) and CapEx (cash from investing) are usually the only items that can be projected on a forward basis.
You can include the impact on cash from financing activities if you know the firm you are valuing pays out a quarterly dividend, for example. However, in most cases, operating assets/liabilities (net working capital) and CapEx are the only items that occur every year and in which the company spends cash on replenishing.
Quibusdam aspernatur porro consequatur cupiditate commodi dolores a. Fugit architecto alias placeat nostrum consequuntur dolorem.
Et repellat sit voluptatem eum. Suscipit officiis illo dolores soluta. Harum quas aut quia at voluptatem quidem ducimus. Eum debitis est eius eveniet quibusdam optio. Cupiditate voluptatem rerum qui libero.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...