DISCOUNTED CASH

FLOWS METHOD
DISCOUNTED CASH FLOWS ANALYSIS
-done by determining the present value of the net cash flows of the investment opportunity.

NET CASH FLOWS – amount of cash available for distribution to both debt and equity claims of
the business or asset. This is calculated from the net cash generated from operations and for
investment overtime. This is preferred as basis of valuation if any of the following conditions are
present:
a. Company does not pay dividends
b. Company pays dividends but the amount paid out significantly differs from its capacity to
pay dividends
c. Net cash flows and profits are aligned within a reasonable forecast period
d. Investor has a control perspective.
LEVELS OF NET CASH FLOWS
1. NET CASH FLOWS to the FIRM – the amount made available to both debt and equity claims
against the company after paying all operating expenses, including taxes and investing in
capital expenditures and working capital as required by business needs.

A. Computation: From Net Income / Indirect Approach

Net Income Available to Common shareholders Php xxx
Add: Non Cash Charges (net) xxx
Interest Expense (net of Taxes) xxx
Add/Less: Adjustment in Working Capital xxx
Less: Net Investment in Fixed Capital
(Purchases – Sales of Fixed Capital Investment) xxx
Net Cash Flows to the Firm Php xxx
LEVELS OF NET CASH FLOWS
B. Computation: From Statement of Cash Flows
Cash Flows from Operating Activities Php xxx
Add: Interest Expense (net of Taxes) xxx
Less: Cash Flows from Investing Activities xxx
Net Cash Flows to the Firm Php xxx

C. Computation: From Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)
EBITDA, net of taxes Php xxx
Add: Tax Savings on Noncash Charges xxx
Add/Less: Adjustment in Working Capital xxx
Less: Investment in Fixed Capital xxx
Net Cash Flows to the Firm Php xxx
LEVELS OF NET CASH FLOWS
2. NET CASH FLOWS to EQUITY – the amount of cash flows made available to the equity or
common equity shareholders only after paying operating expenses, satisfying operating and
fixed capital requirements and settling cash flow transactions involving debt providers and
preferred shareholders.

Computation:
Net Cash Flows to the Firm Php xxx
Add: Proceeds from Borrowings xxx
Less: Debt Service xxx
Add: Proceeds from Preferred Shares Issuance xxx
Less: Dividends on Preferred Shares xxx
Net Cash Flows to the Equity Php xxx
LEVELS OF NET CASH FLOWS
Computation Approaches:
LEVELS OF NET CASH FLOWS
Computation Approaches:
TERMINAL VALUE

Terminal Value – the value of the company in perpetuity or in a going concern environment.

Basis of Terminal Value:

1. Liquidation Value
2. Estimated Perpetual Value
3. Constant Growth
4. Scientific Estimates
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