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CAPITAL CASH FLOWS

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by

Indroneel Das

on 8 July 2016

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Transcript of CAPITAL CASH FLOWS

CAPITAL CASH FLOWS
A SIMPLE APPROACH TO VALUING RISKY CASH FLOWS
COMPARISON TO APV & CCF VALUATION
APV method discounts FCFs at cost of assets and interest tax shields at cost of debt. Therefore, method gives a higher valuation than CCF or FCF.
BASICS OF CCF
FCF method doesn't account of tax-deductibility of interest (interest tax shield) in its cash flows. It's accounted for, as an effective decrease in WACC (the discount rate in FCF based valuation). But WACC depends on capital structure.

CCF method accounts for the interest tax shield in the numerator itself, by using CFs as the total cash available to all capital providers plus the interest tax shield (which increases the after-tax CF). The CCF discount rate will be unaffected by future capital structure changes, as we will show later.

Therefore, the discount rate used here will be a before-tax discount rate. This will be appropriate since this rate will account only for the riskiness of the assets. The effect of the interest tax shield is already accounted for, in the numerator, during valuation.
Valuation using NI
CCF = NI + Depreciation & amortization - Capex - WC + adjustments for deferred tax assets/liabilities + non-cash interest + cash interest
EBIT Valuation
CCF = EBIT - Estimate of corporate tax + CF adjustments + Interest-tax shield
- RICHARD S. RUBACK
DISCOUNT-RATE
WACC= D/V(Cost of debt) + E/V( Cost of equity)


CCF Discount rate = R.F rate + asset β (Risk premium)
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