Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

(Hop HipldF0AV) #1

  • Depreciation 1,009
    = Net capital expenditures) −146



  • R&D expenditures 3,320



  • Amortization of R&D 3,280



  • Acquisitions 1,591
    = Adjusted net capital expenditures1,485


Investment in Working Capital


Thesecondcomponentofreinvestmentisthecashthatneeds
tobesetasideforworkingcapitalneeds.Increasesinworking
capital tie up more cash and hence drain cash flows.
Conversely, decreases in working capital release cash and
increase cash flows.


Defining Working Capital


Working capital is usually defined to be the difference
betweencurrent assetsand currentliabilities.However, we
willmodifythatdefinitionwhenwemeasureworkingcapital
for valuation purposes.



  • Wewillbackoutcashandinvestmentsinmarketable
    securitiesfromcurrentassets.Thisisbecausecashis
    usuallyinvestedbyfirmsinTreasurybills,short-term
    government securities, or commercialpaper.While
    thereturnontheseinvestments maybelower than
    whatthefirmmaymakeonitsrealinvestments,they
    representafairreturnforrisklessinvestments.Unlike
    inventory, accounts receivable, and other current
    assets, cash earns a fairreturn and should not be
    included inmeasuresof workingcapital.Are there
    exceptionstothisrule?Whenvaluingafirmthathas

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