Analytical Approach towards Free Cash Flow V/S Capital Cash Flow
Keywords:
Free cash flow, Capital Cash Flow, Capital expenditure, Kd(Cost of debenture), Cost of Equity (Ke), NWC, TC, Weighted average Cost of CapitalAbstract
Free cash flow is the cash generated in a period, for which the firm has no other profitable investment opportunities .Cash that could be paid out to equity or debt holders free cash flows as almost like ‘excess’ cash generated by the businesses. Capital Cash Flow includes all cash flows paid or payable to investors. In this method, Capital Cash Flows are the cash flows available for all holders of the company’s securities equivalent to the equity cash flow after deduction of company’s assets tax. CCFs equal FCFs plus the interest tax shields. Because the interest tax shields are included in the cash flows, the appropriate discount rate is before-tax and corresponds to the riskiness of the assets. Although the FCF and CCF methods treat interest tax shields differently, the two methods are algebraically equivalent.
References
Corporate Valuation: an easy guide to measuring value by David Frykman, Jakob Tolleryd from Pearson.
Damodaran On Valuation, 2nd Ed by Aswath Damodaran | Flipkart Books
Arditti, F.D. and H. Levy (1977), “The Weighted Average Cost of Capital as a Cutoff Rate : A Critical Examination of the Classical Textbook Weighted Average”,Financial Management (Fall),pp.24-34.
Arzac, E.R. and L.R. Glosten (2005), “A Reconsideration of Tax Shield Valuation”, European Financial Management, forthcoming.
Benninga, S. and O. H. Sarig (1997), Corporate Finance: A Valuation Approach. McGraw Hill.
Booth, Laurence, 2007, ‘’Capital cash flow, APV & valuation’’, European financial management, Vol.13, No.1, pp 29-48 .
Ruback, Richard S. (1995), “A Note on Capital Cash Flow Valuation”, Harvard Business School, 9-295-069.
Fernandez, Pablo (2002), Valuation Methods and Shareholder Value Creation. Academic Press, San Diego, CA.
Inselbag, I. and H. Kaufold (1997), “Two DCF Approaches for Valuing Companies under Alternative
Financing Strategies (and How to Choose Between Them)”, Journal of Applied Corporate Finance (Spring), pp. 114-122.21
