12: 55 (6) Unfolding Capital Cash Flow Valuation

Mechanics of Capital Cash Flow Valuation

Calculating capital cash flows

Capital cash flows include all the cash flows that are to be paid to any

security holder. There are further two methods to calculate the capital

cash flows- either starting with NI or with EBIT.

The Net Income path

The calculations from this path include any tax benefit from debt

financing in the cash flows. Interest is deducted before calculating

taxes, and this increases the net income. 

Cash flow adjustments

(depreciation, amortization, capex, changes in working capital) are

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added to the net income, along with non-cash interest. The 

available

cash flow

 is obtained, and cash interest is added to arrive at the 

capital

cash flow

.

The EBIT path

After the calculations start with EBIT, the initial step is to estimate the

corporate tax rate and convert the EBIT into EBIAT. It is then adjusted

using the 

cash flow adjustments

 as in the above case. The 

free cash

flow

 is obtained in which the interest tax shield is to be added since it

does not include the benefit of debt financing. The final value thus

obtained is the 

capital cash flow

.