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Study Session 11: Equity Investments: Free Cash Flow and Other Valuation Models

Riding the yield curve - does it always have to slope up?

Do expected spot rates ALWAYS have to be BELOW current forward rates? Can they be above?

What i’m asking is.. when riding the yield curve = does it only refer to going LONG on a bond? You cannot go short in “riding the yield curve” ?

Mendosa Case - Question about residual income calculation

Hi guys, I have a question with Mendosa case - Question 6.

The answer said “residual income in year 5 = 5.4*1.155”.

I don’t understand why we need to multiply 1.155, rather than 1.154?

The residual income in Year 1 = Book value of equity in year 0 * (ROE - r)

Please give me some hints. 

Thank you.

R30 - Free Cash Flow Valuation - EOC Q6.

  1. Quinton Johnston is evaluating NYL Manufacturing Company, Ltd. In 2017, when Johnston is performing his analysis, the company is unprofitable. Furthermore, NYL pays no dividends on its common shares. Johnston decides to value NYL Manufacturing by using his forecasts of FCFE. Johnston gathers the following facts and assumptions:

    • The company has 17.0 billion shares outstanding.

    • Sales will be $5.5 billion in 2018, increasing at 28 percent annually for the next four years (through 2022).

After tax interest addition to FCFF

While calculating FCFF we add back after tax interest to it ( + int(1-t) ). By definition FCFF is the cash available to providers of the capital i.e equity holders and bond holders. So, shouldn’t we add back the whole interest to FCFF? Why don’t we include the benefit of tax saving due to interest in FCFF calculation? 

(Eg: Let’s say there’s an owner, an equity holder, a bond holder, and a tax official standing side by side. The owner now distributes money to each of these in the following manner.

EBIT =100 ,

interest = 10 ( to bondholder)

Reading 32 - CFAI EOC question #33

I have a question regarding the calculation/timing of the terminal value. I searched through old AnalystForum threads, but could not find a concise answer.

Working Capital Calculation in Free Cashflow


Could someone help me understand how to calculate change in working capital investment. I understand, the formula is CA - CL in recent year and subtract last year’s CA - CL. I am getting confused with the addition and subtraction when Accounts Receivables increase or decrease and when Accounts Payable increase or decrease.