Valuing Coca-Cola Using The Free Cash Flow To Equity Valuation Model

In this paper, we provide a detailed example of applying the free cash flow to equity valuation model proposed in Damodaran (2006). Damodaran (2006) argues that the value of a stock is the discounted present value of the future free cash flow to equity discounted at the cost of equity. We combine the free cash flow to equity model with the super-normal growth model to determine the current value of Coca-Cola. At the time of this paper, we determined a value of Coca-Cola at $161 billion using the free cash flow to equity model, and the actual market value of Coca-Cola was $150 billion.

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Over-Valuation: Avoid Double Counting when Retaining Dividends in the FCFE Valuation

International Journal of Financial Research ◽

10.5430/ijfr.v8n4p107 ◽

2017 ◽

Vol 8 (4) ◽

pp. 107

Author(s):

Joao Marques Silva ◽

Jose Azevedo Pereira

Keyword(s):

Cash Flow ◽

Flow Model ◽

Weighted Average ◽

Free Cash Flow ◽

Double Counting ◽

Cost Of Equity ◽

Discounted Cash Flow ◽

Enterprise Valuation ◽

A Value ◽

The Cost

Valuation based on DCF (Discounted Cash Flow) has been the dominant valuation procedure during the last decades. In spite of this dominance, enterprise valuation using the discounted FCF (Free Cash Flow) model has some practical drawbacks, since there is often some confusion on how to effectively use it. Commonly, the valuation procedures start by estimating future FCF figures from historical data, such as mean FCF, growth and retention ratio, alongside many other variables. These FCF forecasts are discounted at the cost of equity (FCFE – FCF to Equity) or the Weighted Average Cost of Capital WACC (FCFF – FCF to Firm). Implicit in the above mentioned valuation procedures is the expectation that the company puts the retained free cash that is generating to good use, yielding a value capable of rewarding appropriately the level of risk inherent in the way it used. Some poorly performed valuation studies however tend to double count (Damodaran, 2006a) the retained cash’s interest in subsequent values of FCF, or include the accumulated cash build-up in the Terminal Value. This paper discusses how these two common double-counting mistakes are made and evaluates their weight in the final valuation figure for the particular case of retained FCFE (the case for the FCFF is analogous, but we focus on FCFE for simplicity) using projected figures.

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Stakeholder Orientation, Agency Problems of Free Cash Flow, and the Cost of Equity: Evidence from a Natural Experiment

SSRN Electronic Journal ◽

10.2139/ssrn.3636268 ◽

2018 ◽

Author(s):

Zhihong Chen ◽

Sichen Shen ◽

Hong Zou

Keyword(s):

Cash Flow ◽

Natural Experiment ◽

Agency Problems ◽

Free Cash Flow ◽

Cost Of Equity ◽

Stakeholder Orientation ◽

The Cost

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Agency Costs of Free Cash Flow and the Effect of Shareholder Rights on the Implied Cost of Equity Capital

Journal of Financial and Quantitative Analysis ◽

10.1017/s0022109010000591 ◽

2010 ◽

Vol 46 (1) ◽

pp. 171-207 ◽

Cited By ~ 131

Author(s):

Kevin C. W. Chen ◽

Zhihong Chen ◽

K. C. John Wei

Keyword(s):

Cash Flow ◽

Agency Problems ◽

Equity Capital ◽

Free Cash Flow ◽

Shareholder Rights ◽

Cost Of Equity Capital ◽

Cost Of Equity ◽

The Cost ◽

The Impact ◽

Implied Cost Of Equity

AbstractIn this paper, we examine the effect of shareholder rights on reducing the cost of equity and the impact of agency problems from free cash flow (FCF) on this effect. We find that firms with strong shareholder rights have a significantly lower implied cost of equity after controlling for risk factors, price momentum, analysts’ forecast biases, and industry and year effects than do firms with weak shareholder rights. Further analysis shows that the effect of shareholder rights on reducing the cost of equity is significantly stronger for firms with more severe agency problems from FCFs.

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Financial Constraints and Cost of Equity: Empirical Study of Shariah Compliant Firms in Indonesia

Research in World Economy ◽

10.5430/rwe.v10n3p371 ◽

2019 ◽

Vol 10 (3) ◽

pp. 371

Author(s):

Diana Hashim Syarif ◽

Sugeng Wahyudi ◽

Irene Rini Demi Pangestuti

Keyword(s):

Cash Flow ◽

Financial Constraints ◽

Equity Capital ◽

Free Cash Flow ◽

Investment Efficiency ◽

Cost Of Equity Capital ◽

Cost Of Equity ◽

Capital Costs ◽

Financial Characteristics ◽

The Cost

This study is to investigate the relationship between financial characteristics and the cost of equity capital from sharia-based companies, which tend to be financially constrained. Using 276 observations, the results of this study indicate that financial constraints which are proxied by free cash flow have a role in influencing the cost of equity capital. This study also builds an indirect relationship of free cash flow and capital costs by proposing investment efficiency as a mediator variable. By using the causal step approach from Baron and Kenny, the test results show that investment efficiency mediates the effect of free cash flow on the cost of equity capital with an indirect effect that is stronger than the direct effect. This study also found evidence that leverage has no role in strengthening the effect of free cash flow on the cost of equity capital.

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Dead Hand Proxy Puts and Hedge Fund Activism

Journal of Financial and Quantitative Analysis ◽

10.1017/s0022109018001424 ◽

2018 ◽

Vol 54 (4) ◽

pp. 1615-1642

Author(s):

Sean J. Griffith ◽

Natalia Reisel

Keyword(s):

Cash Flow ◽

Hedge Fund ◽

Cost Benefit ◽

Free Cash Flow ◽

Cross Sectional ◽

Flow Problems ◽

Banking Relationships ◽

Hedge Fund Activism ◽

The Cost ◽

Sectional Analysis

We investigate the Dead Hand Proxy Put, a contractual innovation in corporate debt agreements that may impact hedge fund activism. We find the provision principally in loans, not bonds, and provide evidence linking the adoption of the provision to hedge fund activism. Furthermore, controlling for endogeneity, we find that the provision significantly reduces the cost of loans. Bondholder wealth also increases. Moreover, cross-sectional analysis of share returns reveals that the provision is positively associated with repeat banking relationships and negatively associated with free cash flow problems, suggesting a cost-benefit tradeoff.

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PENGARUH FREE CASH FLOW TERHADAP UTANG

Media Riset Akuntansi Auditing & Informasi ◽

10.25105/mraai.v4i2.1857 ◽

2017 ◽

Vol 4 (2) ◽

pp. 107

Author(s):

Heru Nurwahyudi ◽

Aida Ainul Mardiyah

Keyword(s):

Cash Flow ◽

Hypothesis Test ◽

Agency Cost ◽

Free Cash Flow ◽

Third Party ◽

Manufacturing Companies ◽

Font Size ◽

Public Companies ◽

Agency Relationship ◽

Debt Policy

The objective of this research is to analysis and giving the empirical evidence about the free cas flow and the effect of it for debt policy of public companies in Indonesia. This research was using 66 samples of manufacturing companies in the year 2000 and 90 sample of manufacturing in the year 2001. This sample was elected based on purposive sampling, the hypothesis test is the simple tinier regres-sion.The result of this research showed that hypothesis were suppo4ted, there are influence of free cash flow to the debt policy. In the agency relationship there is differences interest between the principal and the manager also created agency problems that finally also create agency cost. In the shareholders (agents) point of view, this can be minimize by the third party (debtho!der) whose come by the debt policy. Increasing financing with debt will reduce the conflict between the sharehold-ers and the management.Keywords: Free cash flow, debt

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Performance Evaluation of Stocks’ Valuation Models at MSE

Economic and Regional Studies / Studia Ekonomiczne i Regionalne ◽

10.2478/ers-2018-0011 ◽

2018 ◽

Vol 11 (2) ◽

pp. 7-23

Author(s):

Zoran Ivanovski ◽

Zoran Narasanov ◽

Nadica Ivanovska

Keyword(s):

Cash Flow ◽

Stock Prices ◽

Stock Exchange ◽

Free Cash Flow ◽

Main Task ◽

Stock Valuation ◽

Market Prices ◽

Valuation Model ◽

Relative Valuation ◽

Dcf Model

Abstract Subject and purpose of work: The main task of this paper is to examine the proximity of valuations generated by different valuation models to stock prices in order to investigate their reliability at Macedonian Stock Exchange (MSE) and to present alternative “scenario” methodology for discounted free cash flow to firm valuation. Materials and methods: By using publicly available data from MSE we are calculating stock prices with three stock valuation models: Discounted Free Cash Flow, Dividend Discount and Relative Valuation. Results: The evaluation of performance of three stock valuation models at the MSE identified that model of Price Multiplies (P/E and other profitability ratios) offer reliable stock values determination and lower level of price errors compared with the average stocks market prices. Conclusions: The Discounted Free Cash Flow (DCF) model provides values close to average market prices, while Dividend Discount (DDM) valuation model generally mispriced stocks at MSE. We suggest the use of DCF model combined with relative valuation models for accurate stocks’ values calculation at MSE.

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Application of Free Cash Flow to Equity Model in Valuing Mahindra Group Companies: An Empirical Study

SJCC Management Research Review ◽

10.35737/sjccmrr/v9/i1/2019/145547 ◽

2019 ◽

Vol 9 (1) ◽

pp. 74

Author(s):

Bhargav Pandya

Keyword(s):

Empirical Study ◽

Cash Flow ◽

Free Cash Flow ◽

Equity Model

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Manufacturing As A Center For The Creation Of Shareholder Value

Journal of Business & Economics Research (JBER) ◽

10.19030/jber.v8i11.48 ◽

2010 ◽

Vol 8 (11) ◽

Author(s):

Darryl G. Waldron

Keyword(s):

Operations Management ◽

Shareholder Value ◽

Free Cash Flow ◽

Superior Performance ◽

Font Size ◽

Value Drivers ◽

Annual Survey ◽

Significant Relationships ◽

A Value ◽

The Creation

A sample of the best manufacturing firms from Industrial Week’s Annual Survey of Manufacturers (2008-2009) is analyzed within the context of a value driver matrix and free cash flow regime that link manufacturing to important determinants of shareholder value.  The framework for analysis developed in association with this analysis relies on the format advocated by Rappaport (1998), whereby a manufacturing value driver map is derived that isolates those variables generally accepted as determinant with respect to manufacturing performance.  This map is subsequently used to identify that subset of variables that have the greatest impact on value and, in turn, to focus on those micro-value drivers over which operations management has a meaningful level of control.  If superior performance measured in terms of the micro-value drivers is an avenue to manufacturing excellence and the creation of shareholder value, one would expect to see statistically significant relationships between these predictor variables (micro-value drivers) and market value.  Here this proposition is tested by way of a simultaneous reverse entry multiple regression analysis where market capitalization (V0) is treated as a function of a set of manufacturing related micro-value drivers.

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Degree of free cash flow leverage

Review of Accounting and Finance ◽

10.1108/raf-03-2018-0061 ◽

2019 ◽

Vol 18 (3) ◽

pp. 346-365 ◽

Cited By ~ 1

Author(s):

David Yecham Aharon ◽

Yoram Kroll ◽

Sivan Riff

Keyword(s):

Cash Flow ◽

Capital Expenditure ◽

Risk Measure ◽

Efficient Frontier ◽

Optimal Level ◽

Free Cash Flow ◽

Content Type ◽

Optimal Output ◽

The Cost ◽

The Impact

Purpose This paper aims to forgo the conventional (degree of operating leverage) risk measure by replacing elasticity of operating profits with respect to output with elasticity of free cash flow (FCF) with respect to optimal output and by considering exogenous random demand shocks for the firm’s products as a source of risk. Design/methodology/approach The elasticity risk measure accounts for corporate taxes and the cost of bankruptcy. The methodology is selecting optimal level of production investment and capital structure to generate efficient frontier of expected FCF and its risk in terms of its elasticity with respect to output. Findings The risk measure leads to efficient frontier between expected FCF and its idiosyncratic managerial risk. The model also resolves the empirical debate on the tradeoff between operating and financial leverages. Originality/value It is the first elasticity risk measure that embodied the impact of future level of capital expenditure, total level of assets and their sensitivity to random shocks in the product market.

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