Corporate Finance: Instructor\'s Manual Applied Corporate Finance

Aswath Damodaran 496

II. Estimating Cash Flows

Cash Flows

To Equity To Firm

The Strict View

Dividends +

Stock Buybacks

The Broader View

Net Income

• Net Cap Ex (1-Debt Ratio)


• Chg WC (1 - Debt Ratio)
  = Free Cashflow to Equity

EBIT (1-t)

• ( Cap Ex - Depreciation)


• Change in Working Capital
  = Free Cashflow to Firm

Shows the three different cash flows that can be used in valuation.

Cap Ex includes acquisitions and the effect of R&D. (R&D is capitalized)