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Here we'll delve into the nuts and bolts of valuation and explain how we will arrive at some hard numbers.  Some accounting knowledge will be initially assumed, but over time the knowledge required to understand valuation will be lessened by expansion of this section.

We are working on the assumption that any company's value is defined as the net present value of its future free cash flows.  Cash is king, baby.  

Free Cash Flow

Definition:  Free cash flow is the cash available to pay investors (both stockholders and debtholders) after the company has made its investments in fixed assets, new products, and working capital to sustain ongoing operations.

FCF = Operating cash flow - Investment in operating capital

FCF = [EBIT(1 - T) + DEP] - [CAPX + DNWC]

EBIT = Earnings Before Interest and Taxes

(1 - T) = 1 minus the company Tax Rate

DEP = Depreciation and Amortization

CAPX = Capital Expenditures

DNWC = Change in Net Working Capital

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WACC

Definition: Weighted Average Cost of Capital

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For problems or questions regarding this web contact mba-niccolo.
Last updated: November 03, 2007.