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Corporate Finance 1 (Subject) / 3 Determining Cash Flows and Creating Value (Lesson)

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  • Biases Manager's Conservatism and Optimism in forecast Conservatism in forecast: may result if a cash flow forecast will serve as future targets that will influence future bonuses for the manager  Optimism in forecast: may result if the manager gets a bonus for identifying a promising investment opportunity that the firm initiates
  • Project free cash flow (PFCF) cash flows available for distribution to both the firm’s creditors and equity holders Values the project as a whole, i.e. both debt and equity claims
  • Equity free cash flow (EFCF) cash flow available for distribution to the firm’s common shareholders Values the equity claim in the project
  • CAPEX Maintenance CAPEX assets physically wear out and need replacement Growth CAPEX to achieve growth in future cash flows firms require added capacity through investments in new property, plant, and equipment (PPE).
  • NPV rule is a good investment rule because it… adjusts for the timing and risk
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