Cash flow valuation models

In this lesson

1. 0:00 Free cash flows and business valuation
2. 2:29 Calculating free cash flows from accounting data
3. 4:52 Free cash flow to firm method explained
4. 6:55 Valuing equity using discounted cash flows
5. 9:03 Estimating realistic growth rate assumptions
6. 10:43 Free cash flow to equity method
7. 13:42 Dividend valuation model for minority interests
8. 15:03 Valuing redeemable debt securities
9. 18:02 Using spot yield curves for debt valuation

About this lesson

This lesson covers free cash flows, the two main valuation approaches (free cash flow to firm and free cash flow to equity), and how to handle both detailed planning periods and perpetual growth assumptions. You'll work through practical examples including how to value debt securities using credit spreads and spot yield curves, giving you the complete toolkit to tackle AFM valuation questions with confidence. Free cash flows represent the cash generated by a business after all operating expenses, taxes, capital expenditure, and working capital changes—the cash actually available to investors and creditors. Rather than trying to track individual cash transactions, you'll learn to estimate free cash flows by starting with operating profit and making systematic adjustments: adding back non-cash items like depreciation, then deducting investments in fixed assets and working capital. This gives a clear, realistic picture of a company's financial health and earning power. The free cash flow to firm method values the entire business by discounting cash flows at the weighted average cost of capital, then adjusting for investments and debt to isolate equity value. The free cash flow to equity method takes a different route, adjusting for interest and debt movements before discounting at the cost of equity—both methods deliver the same answer but suit different scenarios. You'll also explore how to handle long-term valuations by splitting them into a detailed planning horizon (typically 3–5 years) and a perpetual growth phase, using either a constant perpetuity or a growing perpetuity formula. The lesson includes worked examples on estimating realistic growth rates and valuing debt instruments using credit spreads and yield curves, equipping you to handle the full range of AFM valuation scenarios.

Duration: 20m