TOTALLY just blanked…can you use a RI model for companies with negative FCF? I’m am beyond burned out…
Yes you can as long as clean surplus holds.
yes. as long as the (ROE - r)*BV is positive. RE(t) = RE(t-1) + NI(t) - DVD(t)
That is one of the reason to do so.
ROE -r does not have to hold positive, you can easily have negative RI in a wealth destroying firm and the valuation model will still work.
speaking of, we should make a thread at some point on RI vs FCFF vs FCFE vs GGM when it’s good to use each, like FCFF better to use than FCFE when FCFE is negative and the firm is levered up. FCFF good valuing firms w/ growth rates close to that of overall economy. RI good- companies that don’t have dividend histories companies that have negative free cash flow for foreseeable future (b/c of large capital demands) good for co’s with transparent financial reporting and high quality earnings etc… I’d like to get a good list going b/t when it’s better to maybe use one vs the other.
great idea, banni!! lets do it now? If you guys are not too tired… I just started studying so am still fresh.
you are a maniac. i’m going to bed in a sec. you can either continue here or start up a new one- i will wake up to a wealth of knowledge.
Yeah, I came across a question I think on book 7 #1AM where it was asking exactly what Banny posed above…something about which one to use and one of the clinchers for me picking FCFF over FCFE was that debt-to-equity ratio was 1.0. Super-levered, so I picked FCFF.
If it was right, cool, but I don’t consider a D/E of 1 to be super levered. Sounds about average to me.
I remember from a test I took a few days ago: Firm cap structure stable ---------------------> use FCFE (the reason given is it’s easier) Firm cap structure changing -----------------> use FCFF Ownership perspective ----------------------> use FCFF Dividends aligned with profitability --------> some version of GGM Dividends not aligned with profitability —> FCFE