Free Cash Flow Valuation Model in Capital Budgeting

Abstract

Modern performance measures should provide an accurate assessment of the intrinsic value of the company, as well as the value for the owners (shareholders). The essence is maximizing the immanent or guaranteed value of the company. Free cash flow is a starting point for many valuation ratios, including discounted cash flow, price to cash flow (or its inverse, the free cash flow yield). The Discounted Cash Flow (DCF) valuation reflects the ability of the company to generate cash in future. In knowledge economy the main goal of a company should be directed generating the value for the firm and owners. This implicated the rising importance of free cash flow methodologies that enable investors to efficiently value the companies. The aim of this paper is to present practical approach towards the discounted cash flow of the company (free cash flow to the firm and free cash flow to equity) as valuation method.

Keywords

• project valuation
• discounted cash flow
• free cash flow to the firm
• free cash flow to equity
• capital budgeting