Analysis Of Free Cash Flow

Submitted By wy5155880
Words: 460
Pages: 2

Unlike dividends are the cash flow actually paid to the shareholders, free cash flow is the cash flow available shareholders. Data on free cash flow are not readily available. Stock analysts must interpret financial statements to determine free cash flow. Although free cash flow analysis can prove quite challenging, many analysts consider free cash flow models more relevant than dividend discount models.
In this case, firstly, we calculate the GOPAT by the date of value line. MSFT is 22460, IBM is 19306.
Then, we calculate the value of a company by using the stable-growth, firstly we should get the number of WACC, which is equal to debt and equity component costs, so the debt/ capital ratio should be found in the value line table. (MSFT is 0.14, IBM is 0.6). In some cases, we use the ratio of target debt to capital ratio instead of using current market value weighs because analysts frequently assume that the targeted debt ratio is that which the firm will utilize over the long term. After that, we can get the WACC for two companies. (MSFT is 0.0822. IBM is 0.048). And we can get the growth rate easily (MSFT is 1.93% and IBM is 1.69%). So the value of the IBM is 240177 and IBM is 278679.
Secondly, we use the two-stage model, in this model, the first stage of rapid growth for 4 years abruptly transition to second stage of constant growth that exists in perpetuity. A firm that is expected to have a high rate of growth until patents expires. In the EXCEL, it is clear that the MSFT’s growth rate is larger than that of IBM. (1.93%>1.69%). Also we can see that the MSFT’s terminal value is 289457 is 80.9% of corporate value, however IMB’s terminal value is 219650 is only 78.9% of corporate value. So MSFT’s terminal value