Modeling Leveraged Buyouts ~ Simplified by Senith Mathews

Modeling Leveraged Buyouts ~ Simplified by Senith Mathews

Author:Senith Mathews [Mathews, Senith]
Language: eng
Format: azw3
Published: 2017-07-16T16:00:00+00:00


3.1.4 Free Cash Flow Projections

We are ready to compute the project’s free cash flows once we have the operating cash flows, the working capital cash flows and the capital expenses estimates. We will use the standard approach to computing free cash flows:

Free cash flows = Net income + depreciation and amortization – investment in working capital – investment in capital expenditure

This formula arrives at the free cash flow from the operations of the business by adding depreciation and amortization expenses to net income (because it is a non-cash item deducted from revenues in the income statements) and subtracting the cash required to run the business but not already included as an expense in the income statement (investment in working capital and capital expenses).

Net income and depreciation and amortization have been computed in the operating performance section in rows 46 and 41 respectively. Investment required for working capital is the increase in working capital required over the previous year. The working capital required each year has been computed in the working capital section in row 55. The investment in working capital is computed using the following formula:

Investments in working capital = Working Capital (Year t) - Working Capital (Year t-1)

Capital expenditure required each year as a percentage of revenues was estimated in row 27. We therefore multiply the estimated percentage required for CAPEX with the revenues each year to arrive at the cash required for capital expenses.

To finally arrive at the free cash flow from the operations of the business, we add depreciation and amortization expenses to net income (non-cash item deducted from revenues in the income statements) and subtract the cash required to run the business but not already included in the income statement (investments in working capital and capital expenses).



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