Valuation-Part 1

(JMP as of Nov 11, 2013)

WHAT IS THE SINGLE WORD THAT BEST DESCRIBES

THE ONE AND ONLY REASON TO PURCHASE
SHARES OF STOCK:

EXPECTATIONS

VISION is the art of seeing what is invisible to

others

Thus, to be successful in Finding

Value,
you not only have to see the big
picture,
but
you also have to focus on the details
that others may miss.
Definition of an Investment: A commitment of funds for a period of time
to derive a rate of return that would compensate the investor for the time
during which the funds are invested, the expected rate of inflation
during this time and the uncertainty (risks) involved.

Knowing what an asset is worth and what determines that value is

the basis and prerequisite for intelligent investment decision
making.
Aswath Damodaran, Damodaran on Valuation

APPROACHES TO EQUITY VALUATION

Strengths/Weaknesses of Valuation Approaches
Estimating Intrinsic or True Value of a common stock
versus the market price
Fair Market Value versus Current Market Value
Comparables,
Fundamental Analysis,
Present Values of Cash Flows (PVCF)
Intrinsic & Relative
Valuation
Discounted Cash Flow Techniques(pg379)
Techniques (pg388)
Price/Earnings Ratio (P/E)
Present Value of Dividends (DDM)
Ratio (P/CF)
Present Value of Operating Free Cash Flow Firm
Ratio (P/BV)
(FCFF)
Present Value of Free Cash Flow to Equity (FCFE)
Ratio (P/S)
Important INPUTS:
INVESTORS REQUIRED RATE OF RETURN
ESTIMATED GROWTH RATE of
-Operating Earnings
Profit Margin
- Dividends
Risk Ratios
-Cash Flow
Ratio
-Sales Revenue
Equity Ratio
-Book Value

Relative Value
Price/Cash Flow
Price/Book Value
Price/Sales

Other Ratios
Profitability Ratios:
ROE
ROA
Operating
Financial
Current
Debt to

COMPARABLES* vs Discounted Cash Flow

Free Cash Flow Firm (FCFF) versus Free Cash Flow Equity
(FCFE)
Net Income

versus
3

Cash Flow

Operating Income
Operations

versus

Cash Flow

versus
EBIT

EBITDA

*Comparables: Law of One Price (LOOP) for identical assets

Primary sources of Course Material:

CFA Equity Asset Valuation
Damodaran on Valuation: Security Analysis for Investment &
Corporate Finance, by Aswath Damodaran, New York University
Stern School of Business
http://pages.stern.nyu.edu/~adamodar/

Principals of Corporate Finance: Brealey & Myers;

Investment Analysis Portfolio Management: Reilly & Brown
Chapters 10, 11Security Valuation & 15-Company Analysis & Stock Valuation
Investments: Bodie, Kane, Marcus Chapter 18 Equity Valuation
Models
Other source material:
A Random Walk Down Wall Street, Burton G. Malkeil, Professor of
Economics at Princeton University
(The) Black Swan, The Impact of the Highly Improbable, Nassim Nicholas
Taleb, Distinguished Professor of Risk Engineering at New York
University's Polytechnic Institute
Corporate Finance & Modern Financial Mangement: Ross Westerfield;
Stephen Ross, Franco Modigliani Professor of Financial Economics and
a Professor of Finance at the MIT Sloan School of Management
CFA Level I Equity, Candidate Body of Knowledge;
2013 Ibbotson Risk Premia Over Time Report 1926-2012 , Ibbotson
Associates, Morningstar Inc, Roger Ibbotson, Professor Yale School of
Management.
Financial Times, Wall Street Journal, Global New York Times,

DISCOUNTED CASH FLOW :

PV =
Cash

Cash
(1+%)1

Cash

(1+%)2

Cash +
(1+%)3

Cash

(1+%)4

(1+

y3

y4

y5

+5
5

+5
5

+5

%)5
y1
Cash Flow= +5
Discount
5
5___
@ 5%
(1+.05)1
(1.05)

y2
+5
5
(1+.05)2
(1.1025)

(1+.05)3
(1.1576)

PV of Cash Flow:
6

(1+.05)4 (1+.05)5
(1.2155) (1.276)

@ 5% = +4.762 +

4.535 +

4.319

PV = 21.648

4.114

+ 3.918

Analyzing Change, Growth Rates & Time Value of Money

Using the following financial information, please prepare your analysis of the CAGR for Net Revenues from 2005 to 2009,
using both mathematical formulas
5 year

CAGR
42,550

_______

Analyzing Change, Growth Rates, Forecasting & Time Value of

Money
Using the following financial information, please prepare your analysis of the CAGR
for Net Revenues from 2005 to 2009, using both mathematical formulas that were
presented in class, and prepare both your Net Revenue and Net Earnings Forecasts
for 2010 F
CAGR
+5.36%

-3.687%

+16.939%

+8.60%

+0.7291%

2010 F

F 42,550

Net Margin: 7.87% Avg of +7.5%

+ +6.9%
+ +7.6%
+ +9.28%
+ +8.05%
_________________________________________________________________________________________
CAGR Calculation: 40,386 1/4 -1 = 1.2320691/4 - 1 = 5.3559% CAGR Compound Average Growth Rate
_________________ 32,779___________________________________________________________________
Alternative Geometric Mean Calculation:(1 +(-0.0387)) x (1+0.16939) x (1+0.0860) x (1+ 0.007291) 1/4 -1
(0.9631)x(1.16939) x (1.0860) x (1.007291) 1/4 -1 = (1.232014)1/4 -1=1.05355 -1 = 5.355% Compound Growth
_________________________________________________________________________________________
2005: 32,779
Profit Margin Forecast
x 5.355%____________________________________________________Using Avg Profit Margin
34,534
______ x 5.355%______________________________________Revenue: F 42,550 x 7.87 Avg = F 3,348 Net
36,383
______ x 5.355%_____________________________________________________________________________
38,332
_____ x 5.355%_____________________________________________________________________________
2009: 40,385 x 105.36% = 42,550 Revenue Forecast for 2010
_________________________________________________________________________________________

As instructed above, You needed to show both CAGR (short formula) and Geometric Mean
for Revenue (5.36%), You then need to calculate % of Net Earnings/Revenue for each of the
years and calculate the Arithmetic Average of the Net Earnings Margin (7.87%)

Change from Year to Year Current Year-Prior Year

Prior Year
10

11

EXPECTED RETURNS & MARKET RETURNS

EXPECTED MARKET RETURN
SAMPLE EXPECTEDMARKET RETURN
Date
3-Dec 2003
3-Nov 2003
3-Oct 2003
3-Sep 2003
3-Aug 2003
3-Jul 2003
3-Jun 2003
3-May 2003
3-Apr 2003
3-Mar 2003
3-Feb 2003
3-Jan 2003

S & P Close*
1,111.92
1,058.20
1,050.71
995.97
1,008.01
990.31
974.5
963.59
916.92
848.18
841.15
855.7

Current-Previous
Previous
S & P Returns
(The Market)

0.05077
0.00713
0.05496
-0.0119
0.01787
0.01622
0.01132
0.0509
0.08104
0.00836
-0.017
SUM = 0.2697
& ARITHMETIC AVG # of Observations
0.2697 11 = 0.0245 = 2.45% = Avg Expected Return

12

In Equilibrium: Expected Return=Required

Return
COST OF EQUITY
CAPM=Company Expected Return =
Market Risk Premium

Riskfree rate+ (Expectedmkt return Risk free rate)

---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

COST OF CAPITAL:
WACC=

Weighted Average Cost of Capital WACC

CAPM

Equity Market Value

x
Total Market Value Company

(Expectedcompany return)

+
Current Market Value of Debt x
Debt x 1-Tx)
Total Market Value of Company
Equity Market Value + Current Market Value of Debt
Market Capitalization
13

( Weighted Avg Cost of

Market Price of Stock x #Shares Outstanding

14

MARKET RISK PREMIUM:

Risk free )

(Expected

Fundamentals of Corporate Finance: Ross Westerfield Jordan

Ibbotson Risk Premia Over Time Report, Ibbotson Associates,
Roger Ibbotson, Professor Yale School of Management.

15

mkt return

Life is full of surprises and the unexpected

What the Market Giveth/

The Market can taketh Away

Comparison of Techniques and Models:

As the Free Cash Flow approach is

2 Stage Dividend Discount Model

similar in concept to the Dividend
Discount Model, it should provide a
DDM with earnings multiple terminal value
similar estimate of Intrinsic Value,
3 Stage DDM
if it is possible to forecast to the
Free Cash Flow to Firm
period of constant growing
dividends: Modigliani & Miller;
Free Cash Flow to Equity
Current market price
However, in practice values may
IMPLIED EQUITY PREMIUM
differ considerably as assumptions
Forward Looking versus HISTORICAL ANALYSIS
for time to dividends, etc are
difficult.
All in All, these are all ESTIMATES
16

Enterprise Value:
Market Capitalization plus debt, minority interest and preferred
shares, minus total cash and cash equivalents.

MVIC (Mkt Value Invested Capital):

Combination of shareholders equity and interest-bearing debt at
Current Market versus Book Value.

Dividends versus GROWTH

(BKM pg 589)

RATE OF RETURN & EXPECTED or REQUIRED RETURN

CAPM, Cost of Equity & the MARKET CAPITALIZATION
RATE:
k
At Equilibrium, the Rate of Return investors can expect to
earn is defined by
Rfree + (Exp mkt return - Rfree )
Expected Return = Required Return
This is the Rate of Return an investor can expect to earn
given its
RISK as measured by eta
The Required Return of any given investment with
EQUIVALENT RISK
Equilibrium & Fair Pricing, Correct Price & Fair Return
Expected Return = Required Return
Expected Holding Period Return (EHPR) versus CAPM
EHPR = ExpectedReturn
Price0 ]

= Exp Div1 + [Exp Price1 Current

Current Price0

If EHPR

CAPM k , then BUY more Shares

Risk Measured
17

Required Return
INTRINSIC Value : V The actual value of a company or an
asset based on an underlying perception of its true value
including all aspects of the business.

V0 = Present Value, PV, of all cash payments to investors

including
Dividends and FINAL sale of stock, Discounted at RISK
Adjusted
CAPM = k

V0 =

If

V0

ExpDiv1 + Exp Price1

(1 + k )

(1 + CAPM)
is less than the Current Market = SELL

(BKM pg590)

MARKET CONSENSUS VALUE

In Market Equilibrium, the Current Market Price reflects the
Intrinsic Value and computed V0 reflects the Estimate of
All Market Participants
Thus, the Market Consensus Value is the Market
Capitalization Rate k

INTRINSIC
Price

Dividend

Price

Div

in one year

in one year

year 2

year 2

V0
P2
Today
k)

Div1

P1

( 1 + k)

V1
In Year

18

Div2

( 1 +

In the DDM, Dividend Discount Model, Stock Price today is

the
Present Value of All Expected Future Dividends into
Perpetuity
(BKM pg 591)

Constant Growth DDM When g is < k

(k- g)
g=growth k= CAPM or
Capitalization Rate
In a market where
(BKM pg592)

V0 = D0(1+g)
(1+k)

V0

V0 = Market Price Today

Todays
Intrinsic
Value
+ D0(1+g)2
(1+k) 2

Or
= D0(1+g) =
(kg)

P0

+ D0(1+g)3 + ..
(1+k) 3

D1
(kg)

DDM=For Constant Growth Div, Rate of Stock Price

Appreciation (inc)
In any year will equal that constant growth rate g
The HPR Holding Period Return
Expectedreturn = Dividend Yield
Expectedreturn =

+ Capital Gains

D1 + P 1 P 0
P0
P0

= D1 + g
P0

Thus, Market Capitalization of stock, k ,

(BKM pg594)
(stock price at Intrinsic V0 price)
then Expected Return
Expected Holding Period Return = k , thus, k = Div1 + g
P0
19

Thus, what is the investors:

Required or Expected Rate of Return (CAPM for
example)

Top Down-3 Step Approach versus Bottom Up Individual Stock Valuation

Approach
Focus on Economy & Industry
Focus on finding Undervalue
versus the Market
THE ONLY THING CERTAIN IS CHANGE
There is No One Magic Bullet, No One Magic Formula,
Returns come from Enterprise Earnings, Cash Flows, Dividends, Interest
Payments, Capital Gains
Valuations include Multiplier of Enterprise Earnings, Present Value of
Cash Flows, Present Value of Dividend Payments
Required Rate of Return includes Real Risk Free Rate PLUS Expected
Rate of Inflation, PLUS Risk Premium from uncertainty of returns for
risky assets.
Value vs Growth: (pg 543)
IDENTIFICATION OF VALUE STOCK COMPANIES: companies that
appear to be undervalued for reasons other than earnings growth
potential, they general have low P/E or P/Book ratios,
IDENTIFICATION OF GROWTH STOCK COMPANIES: companies that are
experiencing rapid growth of sales & earnings, they have positive
earnings surprises and above average risk adjusted rates of returns
because the stocks are undervalued

Current Market Share Price

Or
Computed VALUE
Div growth g

=
Expected Dividend Next Period D1
Required or Expected Rate of Return k Expected

20

Market Capitalization Rate

Return
(BKM pg 589) k
of Return

At Equilibrium Expected Return = Required

=

CAPM

At Market Equilibrium, the Rate

Investors capital can expected to earn is

:
=

Riskfree + (Expectedmarket return

Riskfree )
The Required Rate of Return an investor can expect to earn given its RISK as
measured
By eta;
The Required Rate of Return of any investment with Equivalent Risk
Equilibrium (Correct Market Price) & Fair Pricing (Fair Return commensurate
with Risk)
EXPECTED RISK = k = CAPM = REQUIRED Return
MARKET CAPITALIZATION
Expected Holding Period Return
Period
EHPR
Current Mkt Price]

Exp Div end of period Exp Price end of

=

Exp Div1

[ Exp P1

Current Market Price

Thus, if Exp Holding Period Return

if Exp Holding Period Return

<

CAPM k , then BUY more shares

Risk measured Required Return
CAPM

k , sell

b = Earnings Retention Rate (Ratio) or Plowback =

(BKM pg 597) Net Income-Dividends =Reinvestment

Net Income-Dividends
Net Income

Total Assets Total Liabilities = Shareholder Equity = Book Value

Return on Equity = ROE =

Net Income
Shareholder Equity

Growth = g = Return on Equity x plowback

Plowback or Reinvestment =
g

= Return on Equity

ROE

x plowback
x

plowback
21

g = Reinvested Earnings
ROE x b
Book Value

Reinvested Earnings x

Net Income =

Net Income

Book Value

Shareholder Equity

Shareholder Equity

Price Today
Dividend End 1 yr
P0
=
D1____
(k
- g)
reinvestment
Expected
growth
or Required Return
g

P0

Exp Earnings
D 1 = E1
x

plowback
(1 - b)

ROE x b
E1 x (1 - b)
( k - ROE x b )
g

Price to Earnings Ratio:

Growth

Price today

Expected EPS

(BKM pg 605)

k exp return

return
Price Today

1+ Present Value
EPS/k exp
(pg 604

BKM Investments)

P0

E1 x (1 - b)
( k - ROE x b )

P0 =
(1 - b)
E1
( k - ROE x b )
opportunities for
g

P/E ratio increases with Increased ROE

Higher ROE gives good prospects &
growth

= 1 - Plowback_____________ =
k exp return ROE x plowback

Div Payout
k exp ret g

expected growth
If ROE is less than k expected/required return, investors prefer the company
payout more dividends, rather than reinvest in an inadequate return,
As ROE is lower than k req exp return, the value falls as plowback
(reinvestment) increases.
Conversely, as ROE exceeds k req exp return, the firm is more attractive and
value increases.
22

A firm with good investment opportunities will be rewarded by HIGHER P/E

multiples
IF the firm takes advantage by aggressive Reinvestment (Plowback b )
P/E ratio increases with ROE
Higher ROE gives good prospects & opportunities for growth
P/E also increases with greater b (plowback) as long as ROE exceeds k
(Required or Expected Return, the Capitalization Ratio)

P V G O Present Value Growth Opportunities

EPS in 1 year
P0

E1

Equation representing when PVGO = 0, all Earnings

NO Reinvestment, NO Growth
However, as Reinvestment Grows PVGO becomes

paid out
more
(BKM pg 604)

Important and P/E ratio can rise significantly

Share Price Today

P0
= 1 1 + PVGO
Opportunities
E1
k
E/k
higher P/E ratio
EPS in 1 year
Req Ret.
Exp Ret.
market optimism

PVGO represents future Growth

as these dominate, the firm will have
Representing these Growth Opportunities.
This higher P/E ratio is a reflection of

PVGO to _ E_ = Ratio of Components of Firm Value due to Growth

Opportunities
k
to
Component of Value due to assets already in place
Share Price

For DDM: Dividend Discount Model

Price Today P0 = Div1

(kg)
Where Dividends = Earnings: No Reinvestment & No Growth
Thus, Div1 = E1 (1 - b )
Where b , the Reinvestment, the plowback is Zero
Div1 = E1
Higher P ratio or multiple indicates more rapid expectations of Growth of
Earnings,
E
23

Higher Growth Prospects:

Higher P/E multiplier

Expected Growth Opportunities

Reflection of Market optimism concerning a firms prospects
If the analyst is more optimistic than the market: Recommend BUY

DDM

Price0 = Div1
(k g )
Price Today
Where Div = Earnings, NO Reinvestment
Div1 = E1 (1-b) where b is zero, Thus, Div1 = E1

(BKM pg 598)

Growth will enhance value of Firm ONLY if new investment opportunities

achiever attractive Growth where ROE k
CAPM
Capitalization Rate

ISSUE WITH P/E is E can be unreliable as it is an Accounting Number and a

Forward Earnings is just a Forecast
Price to Sales Ratio (on a per share basis) is useful for firms in startup phase
where there are low or negative earnings or no public disclosure
Price to Book Value Ratio (on a per share basis) is highly dependent on
relationship of accounting value to current market or replacement costs of
assets as well as Goodwill and intangibles such as brand names or firm
reputation not reflected on the companys balance sheet
Price to Cash Flow Ratio (on a per share basis) is often used as Cash Flow
is less variable that Earnings (Net Income) Operating Cash Flow or Free Cash
Flow ( Operating Cash Flow New Investment)
Book Value versus Liquidation Value: sale of all assets at current market and
distribution of proceeds to repay debts and residual claimants, the
shareholders
Time Horizon or Expected Holding Period:
24

Expected Holding Period Return for 1 year:

EHP Return

Exp ret % = Exp (Div in 1 yr) + [ Exp price in 1yr - Price Today]
Price Today
Exp Div Yield in One Yr Div1 + Exp % Price Appreciation [Exp Price in 1 yr
Price today]
Price today
Price today
Expected Holding Period Return

versus

Expected Return from CAPM

CAPM=Expected Investor Return based on a measurement of RISK, the Beta

relationship to the Market
CAPM = Risk free rate + (Expected Return Market Risk free rate ) =
Risk free rate + (Market Risk Premium)
Will Expected Return equal Required Return based on Risk
Relationship of Expected Return, Required Return and INTRINSIC VALUE
Intrinsic Value= Present Value of All Cash Payments to the Investor, Includes
Dividends and Proceeds from Final Sale of Stock/discounted at a Risk
Adjusted Rate
Does calculated Intrinsic Value exceed current Market Value? If so, it is
possibly undervalued and might represent a buying opportunity.
Intrinsic Value =

Exp Div in 1 yr + Exp Price in 1 yr

(1 + Risk Adjusted Interest Rate)
CAPM
So you need to develop inputs for
Exp Div in 1 yr,
Exp Price in 1 yr and
Risk Adjusted % (CAPM), your Required Return for this level of Risk
Market Capitalization Rate=
The Market Consensus for the above Risk Adjusted %,
your Required Rate of Return for the discount

DIVIDEND DISCOUNT MODELS (DDM)

Intrinsic Value today = Dividend in 1 year + Price in 1 year
( 1 + k Required Return CAPM)

25

Intrinsic Value today = (Div in 1 year) + (Div in 2 year) + (Div in 3 year) +

( 1 + k)1
( 1 + k)2
( 1 + k)3
The DDM includes Capital Gains by assuming the price at which you sell in
the future is dependent upon the dividend forecast going forward at that time
of future sale.

Constant Growth Dividend Discount Model

To compensate for the need of an infinite forecast of dividends
For Constant Growth
Dividend Today x (1 + growth rate)x
Intrinsic Value =
rate)2 + ..

Div Today x (1 + growth rate)1 + Div Today x (1 + growth

(1 + k)1

(1 + k) 2

Equivalent to: Constant Growth Dividend Discount Model

Intrinsic Value = Div Today x (1 + growth rate) =
DDM
k-g

D1 = Constant Growth
k-g

(Solution to this transformation at end of this paper)

D1 = Dividend in one Year = D0 (1+g)

k

= cost of equity

CAPM

EXPECTED COMPANY RETURN

= growth rate = RR x ROE = Resources Retained x ROE (Sustainable

Growth Rate)
RR= % of Retained Earnings (pg 348) Plowback = (1-Div Payout)
NOTE: Constant Growth DDM is only valid when k (expected required return)
is greater than g (dividend growth rate), if g (dividend growth rate) is greater
than k (expected
required return) then this condition is unsustainable; substitute the MultiStage DDM model.
Thus, it is implied that with a constant growth of dividends, the rate of Stock
Price appreciation with equal the constant growth rate g .
26

This is a situation where it is expected that P = should be equal = Intrinsic

Value
It there is a difference, how long will this condition exist/when will this
difference converge or disappear.

CASH FLOW FIRM

CASH FLOW EQUITY

(BKM pg 612)

Free Cash Flow Firm

FCFF = EBIT (1-Tax rate)

+ DEPR
- Capital Expenditure
-Inc in Net Working Capital (NWC)

Discounted at WACC
Less Mkt Value of Debt
= Calculated Value of Firm
Or for Free Cash Flow Equity
FCFFirm
- %Interest Exp x (1 Tax rate)
+ Inc in Net Debt

27

Free Cash Flow Firm (FCFF) versus Free Cash Flow Equity
(FCFE)
Cash Flow available to all providers of Capital
Cash Flow available to suppliers of capital after ALL
Operating Expenses (including taxes) have been paid and
Operating Investments have been made.
From Net Income available to Shareholders
PLUS Net NON Cash Charges
PLUS Interest Expense x (1-tax rate)
LESS Investment in Fixed Capital
LESS Investment in Working Capital
(Working Capital=Current Assets-Current Liabilities)
Free Cash Flow to the Firm From Cash Flow Operations =
CASH Flow Operations
PLUS Interest Expense x (1-tax rate)
LESS Investment in Fixed Capital

versus Free Cash Flow Equity (FCFE)

Cash Flow to Equity Holders (Common
Shareholders) ONLY:
FCFE is the amount the company can afford to pay
to shareholders as dividends,
Earnings are more volatile than Dividends
FCFEquity is FCFFirm reduced by Interest Paid to
Debt Holders PLUS any Net Increase in Borrowing.
Free Cash Flow Equity:
Free Cash Flow Firm
LESS Interest Expense x(1-tax rate)
PLUS New Debt Borrowing
LESS Debt Repayments

28

FCFF = CFO
+ [Int x (1-tax rate)]
FCInv
Interest (After Tax) is added back to NI
because it is a Cash Flow that has been
Generated and Paid to Contributors of
Capital.
Thus, this cash should be part of what we are
defining as Free Cash Flow Firm

Where:
CFO = Cash Flow from Operations
Int = Interest Expense
FCInv = Fixed Capital Investment (total
capital expenditures)
Capital Investment is generally defined as the
Capital needed to sustain growth rates and
generally is defined to cover PPE (Plant
Property & Equipment). However, sometimes
because of the difficulty in identifying just
these Capital Expenditures, all Capital
Expenditures including Acquisitions are
included.
29

This formula is different for firm's that follow

IFRS. Firm's that follow IFRS would not add
back interest since it is recorded as part of
financing activities. However, since IFRS
allows dividends paid to be part of CFO, the
dividends paid would have to be added back.
The calculation using Net Income is similar to
the one using CFO except that it includes the
items that differentiate Net Income from CFO. To
arrive at the right FCFF, working capital
investments must be subtracted and non-cash
charges must be added back to produce the
following formula:
FCFF = Net Income
+ NCC
+ [Int x (1-tax rate)]
FCInv
WCInv
Interest (After Tax) is added back to NI
because it is a Cash Flow that has been
Generated and Paid to Contributors of
Capital. Thus, this cash should be part of
what we are defining as Free Cash Flow
Firm
30

Where:
NI = Net Income
NCC = Non-cash Charges (depreciation and
amortization)
Int = Interest Expense
FCInv = Fixed Capital Investment (total capital
expenditures)
WCInv = Working Capital Investments
Free Cash Flow to Equity (FCFE), the cash
available to stockholders can be derived from
FCFF. FCFE equals FCFF minus the after-tax
interest plus any cash from taking on debt (Net
Borrowing). The formula equals:
FCFEquity = FCFFirm
- [Int x (1-tax rate)]
+ Net Borrowing

31