FCFF - Calculating CAPEX
Hi,
For calculating the the FCFF, what should go into CAPEX ?
Does it include proceeds from sale of assets that were used for operations?
Doess it include the expenditures to grow operations or only to maintain operations ?
Thanks
Yes reduce CAPEX by proceeds from sales on operating assets. include both grow and maintain, but when forecasting FCFF use the inflation rate to predict maintenance expenditures.
Look out for the break-down of R&D expenditures as some may be operating and others capitalized development costs.
FCFF question (Originally Posted: 08/12/2014)
Hi everyone, i was trying to do a FCFF calculation with the end goal of arriving at a present day Enterprise Value and equity value.
Now the company I am trying to value has existing assets, and I want the assumption that in 3 years' time they are going to acquire an asset (Eg. a US$100m plant, assume 70% debt financed) which will then contribute towards revenue and cost and hence affect cash flows.
My question is, how does that future capex affect the series of cash flows? For example, does it mean that in year 3 i totally include the debt financing? I understand that FCFF usually includes only the maintenance capex, so how do i account for such future expected non-maintenance capex? Also, I usually add current net debt to the Enterprise value obtained to arrive at Equity value. Am i missing out on the future debt financing then?
I am pretty sure i am making some mistakes regarding this future capex, hope you can help to clear my doubts! Thanks!
You would add $100m to capex in year 3 (meaning your free cash flow is reduced by that amount in that year). Capex doesn't only include maintenance capex, it includes all changes in operating fixed assets. Since a plant is most likely used in the operations of the company the investment should be included in the free cash flow calculation.
And you would subtract net debt from the enterprise value to end up with the equity value, and yes, you subtract the current net debt. To capture the future debt increase you can adjust the cost of capital to reflect this change in leverage. This would affect the present values of the cash flows generated after the debt increase.
Ok i tried to fall back on first principles, and thought that for FCFF, the entire US$100m future capex will be an outflow to the equity and debt holders of the company, hence the entire US$100m is an outflow under FCFF.
Does it mean that if i use a single discount rate (eg the WACC), the underlying assumption is that this future capex will be financed at the same debt-equity proportion as today? And if i want to change that assumption of debt-equity proportion , i simply have to apply a different discount rate starting from the year of this new capex?
where to get the inputs to calculate FCFF? (Originally Posted: 11/17/2017)
Hello friends,
I am trying to learn DCF valuation, however, the books I read (McKinsey and Damadoran) and the online resources I looked at have conflicting sources of where they get their inputs.
for example:
For calculating Net Capital Expenditures, some models just take the number on the cash flow statements, while others calculated the change in gross PPE from the balance sheet and subtract that from the D&A listed in the income statement. Some others calculated the change in both gross PPE and D&A from the BS to get the net Capex.
For working capital, some look at the cash flow statement, some calculate change in AR, INV., and AP, and some just calculate change in working capital net cash and cash equivalents.
These methods yield different results for the same company. Please HELP!
We need something similar to GAAP in finance.
Hi spinoff, just trying to help:
More suggestions...
If those topics were completely useless, don't blame me, blame my programmers...
Beginner questions about FCFF (Originally Posted: 03/25/2017)
Hello. I have been self-teaching finance for a while but I still have a few questions that I have not managed to find answers for a while. Hopefully some of you could help me to find answers to these questions ;( When calculating FCFF: 1. Should all FCFF calculation results match? Because then I start with EBIT/EBITDA - both results match. But when i calculate FCFF from CFO or net income - none of them match. I think I am doing something wrong but don`t know really what.
Interest * (1- tax rate): what do I use in the calculations. Interest expense - interest received? What does that interest stands for ? In all the formulas, it`s written (1-tax rate). Should I use effective tax rate or corporate finance rate? Thank for your help in advance :D
I believe they should equal as they are all unwinding known accounting conventions (GAAP/IFRS).
Use interest expense and google "damadoran 25 dcf questions" and refer to Q/A #3 for the marginal/effective tax rate. Sorry, as a new member to wso, I can't post links.
Found about the tax rate - thanks.
All FCFF calculations should be equal but when i start with Net income - they dont. I believe i am doing something wrong in the interest expense part but for the second day i can`t seem to find what ;(
I have interest income of 1,19 and interest expense of 2,04 and taxrate of 15%. INt*(1-tax rate) should be 0,35 for all the FCFF calculations to match.
FCFF: discrepancy due to increased capital? (Originally Posted: 10/22/2013)
Hi. I have a question regarding free cash flow to firm valuation when there is an increase in capital/balance sheet due to growth requirements in the following year.
For example, let's say that the company has debt of 50 now and a FCFF valuation yields an EV value of 100. The forecasted financial statements indicate that the company will finance growth with a 30 increase in debt in one year's time (and perhaps there is more equity as well in order to maintain WACC). Let's assume that one year from now things are as forecasted, we perform the same valuation and the financial forecasts should be no different from before (the original forecasts took the increased debt into account right?) and now the company has taken on more debt (=80). Once again, the FCFF method should yield an EV value around 100 assuming no significant changes in yearly free cash flow or WACC. But if the EV is the same, equity would be only 20 (=100-80) one year from now which makes no sense because an increase in debt shouldn't change the value of equity.
So to summarize, the company has a certain EV valuation and an increase in debt will result in an increase in EV of similar magnitude and thus equity value is unchanged. But how free cash flow valuations take this into account?
Am I missing something fundamental here?
Thanks.
Your explanation makes absolutely no sense. Stick to riding Vince's balls.
What happened to the debt that was taken on?
The point of taking on debt is to:
1) increase FCFF (EBITDA in the real world) through using that debt to fund growth (acquisitions, organic growth/CapEx, etc.) or
2) Provide a dividend to the shareholders
Assuming EBITDA/cash flow stayed the same, the Company would have an extra $30mm of cash on the balance sheet. That belongs to shareholders and is accounted for in a transaction.
If you took on an extra 30M in debt, then you've got an extra 30M in cash, which nets off to land you at the same equity value as before.
this
Just mechanically the equity value = EV - debt + cash. So as others have pointed out, EV is the same, debt goes up 30, cash goes up 30, net debt does not change (remains 50) and therefore equity remains 50.
You said that the increase in debt will result in an increase in EV by the same magnitude. This isn't true. Enterprise Value is Equity + Net Debt (Debt - Cash). You would also potentially subtract non-cash excess assets if applicable. You can think of EV as the value of the operating business itself; the value of the operating business essentially doesn't depend on financing (OK, yes it does as a result of tax effects, but let's keep it really simple) or excess assets such as cash and securities beyond what is needed to finance operating needs. But then to value the equity/debt claims you have to take into account financing and excess assets.
This. You need to keep "double entry" book keeping in mind, an increase in debt should result in an increase an asset (could be PPE, inventory or cash) so the net effect on the equity value would be zero.
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