acquisitions. The second part relates to investments in
noncash working capital, mainly inventory and accounts
receivable. Increases in noncash working capital represent
cash outflows to the firm, while decreases represent cash
inflows.Noncashworkingcapitalatmostfirmstendstobe
volatileandmayneedtobesmoothedoutwhenforecasting
future cash flows.
Inthelastpartofthechapter,weexaminetwomeasuresof
cash flowsto equity: the actualdividendspaid, which are
easilyobservablebutarediscretionary,andabroadermeasure
of potentialdividends,thefree cashflow to equity,which
captures cash available after meeting reinvestment and
financingneeds.Manyfirmspayoutlessindividendsthan
theyhaveavailableasfreecashflowtoequity,andwewill
obtain more realistic estimates of equity value using the latter.
1 Ifonly amortizationwere taxdeductible, thetaxbenefit
from R&D expenses would be:
ThisextrataxbenefitwegetfromtheentireR&Dbeingtax
deductible is as follows:
Ifwesubtractout(R&D−Amortization)(1−Taxrate)and
addthedifferentialtaxbenefitthatiscomputedabove,(1−
Tax rate) drops out of the equation.
2 Notethatwecanarriveatthisvalueusingthepreceding
tableandshiftingtheamortizationnumbersbyonerow.Thus,