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Strategies & Market Trends : Free Cash Flow as Value Criterion
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To: tyc:> who wrote (246)1/31/2000 4:38:00 PM
From: HeyRainier  Read Replies (1) of 253
 
You can assess the value of that free cash flow by (here's the unpleasant part) discounting them via the present value equation. The question of the discount rate is always chasing analysts, so that's something you'll need to determine for yourself. Generally, cost of equity is estimated at around 12%, and is adjusted accordingly for the firm's individual risk.

One other question you need to answer is what type of free cash flow it is. There are two types: FCFF (free cash flow to the firm), or FCFE (free cash flow to equity). Depending on which, you'll need to discount it by either the cost of capital (for FCFE), or the weighted average cost of capital (for FCFF).

That's the textbook answer, at least.

RT
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