Vhhjgv

Uday Damodaran XLRI Jamshedpur

Session 5: Measuring Cash Flows

BM 10-12: FM II Session 5

1

Uday Damodaran XLRI Jamshedpur

First…

The Every Class Quiz 4…

BM 10-12: FM II Session 5

2

Uday Damodaran XLRI Jamshedpur

Raw Material…

Cash Flows… what are they?

BM 10-12: FM II Session 5

3

Uday Damodaran XLRI Jamshedpur

Benchmarking- recollect

Compare RONW to equity investors’ desired rate of return Compare ROCE to desired rate of return of long term investors

BM 10-12: FM II Session 5

4

Uday Damodaran XLRI Jamshedpur

Defining Cash Flows

Investment = Rs.1000; 100% Equity Funding Yr 1 Revenue Costs Deprn PBT Tax PAT 1000 500 250 250 150 100 Yr2 1500 800 187.5 512.5 307.5 205 Yr3 2000 1000 140.63 859.37 515.62 343.75

BM 10-12: FM II Session 5

5

Uday Damodaran XLRI Jamshedpur

Defining Cash Flows CF0 -1000 350 392.5 484.38 421.87 350 392.5 906.25 CF1 CF2 CF3

-1000

BM 10-12: FM II Session 5

6

Uday Damodaran XLRI Jamshedpur

Defining Cash Flows Investment = Rs.1000; 50% Equity Funding; 50% loan@20% Yr 1 Revenue Costs Deprn Interest PBT Tax PAT 1000 500 250 100 150 90 60 Yr2 1500 800 187.5 100 412.5 247.5 165 Yr3 2000 1000 140.63 100 759.37 455.62 303.75

BM 10-12: FM II Session 5

7

Uday Damodaran XLRI Jamshedpur

Defining Cash Flows CF0 Equity Point of View -500 310 -500 -1000 410 -1000 410 452.5 452.5 544.38 421.87 966.25 310 352.5 352.5 444.38-500 421.87 366.25 Long-Term Funds Point of View CF1 CF2 CF3

BM 10-12: FM II Session 5

8

Uday Damodaran XLRI Jamshedpur

Measuring Cash Flows: Different Points of View EQUITY POINT OF VIEW: INITIAL OUTLAY: EQUITY OPERATING CASH FLOWS: PAT+NON CASH EXPLOAN REPAYMENTS LONG TERM POINT OF VIEW: INITIAL OUTLAY: LONG TERM FUNDS EMPLOYED OPERATING CASH FLOWS: PAT+NON CASH + INT

BM 10-12: FM II Session 5

9

Uday Damodaran XLRI Jamshedpur

Brealey, Myers…

Separating Investment and Financing Decisions: “Our analysis of...