Corporate Finance

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Corporate Finance

entire downstream investment proved to be futile. Currently SAIL is undergoing massive restructuring,
under the guidance of McKinsey & Co.
What is your assessment of Company-1 and Company-2? Company-1 is Cadila Healthcare, a pharma-
ceutical company manufacturing cardio-vascular drugs, antibiotics, etc. The company made an initial public
offering of shares in the year 2000. Company-2 is Infosys Technologies, one of the best known corporate
success stories so far.

The Link between Cash Flows and Firm Value

The value of a firm is equal to the present value of future cash flows.^3

V = ∑

∞

=

+

1

(Cash flow ) /(1)

t

t

t k

where, cash flow = EBIT(1 – T) + Depreciation –(+) increases (decreases) in working capital – Capital
expenditure; and k = Discount rate = WACC.

Since the value of the firm is determined by the cash flow it generates, an analysis of the drivers of cash
flow (Exhibit 5.7) would be useful. The value of the firm can also be rewritten as present value of free cash
flows, discounted at cost of unlevered equity plus the present value of debt tax shields discounted at cost of

Exhibit 5.7 Drivers of cash flow

(^3) These concepts will be explained in greater detail in the chapters that follow.