Free Cashflow

def. Cashflow Statement. A table showing the firm’s cash in and out.

• D&A addback: you’ve already payed for the factory (un-smearing the cost)
• CapEx & Salvage: money you’re paying for the capital [=capital expenditure], and cash from selling the capital
• Change in Working Capital: Recieveables & Payables

$$\text{Net Income}=\stackrel{\text{EBITDA}}{\overbrace{\text{Revenue}-(\text{COGS, SG\&A})}}-(\text{D\&A}+\text{Interest})-\text{Taxes}$$ $$\text{Free Cash Flow}=\text{Net Income}-\text{CapEx}+\text{D\&A addback}\pm \text{Net Recievables}$$

e.g. The process of valuing a firm using Free Cash Flows:

1. Calculate Net Income (excl. interest, tax, etc.) from Income Statement
2. Calculate Free Cashflow (w. CapEx & Salvage)
3. Discount future cash flows to get Net Present Value = Firm Value Discount parameter is usually obtained from investments with similar risk profiles, or the WACC formula.

Internal Rate of Return (IRR). It’s another type of interest rate.

• Too much cash isn’t a good thing, because it means they’re not getting high return on capital.