01 — Notebook Information & Scope

Intrinsic Valuation Axiom

“Price is what you pay; value is what you get.” — Warren Buffett. The intrinsic value of any commercial asset equals the present value of its future free cash flows discounted at a rate reflecting the risk profile of those flows.

Domain: Finance & Capital Allocation
Subject: Corporate Valuation
Core Reference Model: Free Cash Flow to Firm (FCFF) Discounting & Modigliani-Miller Theorem

02 — Free Cash Flow to Firm (FCFF) Derivation

FCFF Unlevered Cash Flow Equation

FORMULA

FCFF represents cash generated by core operations available to all capital providers (both debt holders and equity shareholders) after reinvestment in capital assets and working capital.

$$\mathrm{FCFF} = \mathrm{EBIT}(1 - t) + \mathrm{D\&A} - \mathrm{CapEx} - \Delta \mathrm{NWC}$$

Variable Definitions & Units:

$\mathrm{EBIT}(1 - t)$ Net Operating Profit After Taxes (NOPAT)

$\mathrm{D\&A}$ Depreciation & Amortization non-cash tax shields added back

$\mathrm{CapEx}$ Capital expenditures invested in fixed assets / property, plant & equipment

$\Delta \mathrm{NWC}$ Net change in non-cash Working Capital (Accounts Receivable + Inventory - Accounts Payable)

03 — Weighted Average Cost of Capital (WACC)

WACC Hurdle Rate Equation

FORMULA

Reflects the minimum expected hurdle rate of return demanded by the enterprise's combined capital providers.

$$\mathrm{WACC} = \left(\frac{E}{V}\right) r_e + \left(\frac{D}{V}\right) r_d (1 - t)$$

Variable Definitions & Units:

$E / V$ Proportion of equity in total enterprise market capitalization

$D / V$ Proportion of debt in total enterprise market capitalization

$r_e$ Cost of equity derived from CAPM: r_e = r_f + beta * (r_m - r_f)

$r_d (1 - t)$ After-tax cost of corporate debt (accounting for corporate tax interest shield)

04 — Active Recall Flashcards & Conceptual Quiz

🗂 Flashcard • Key ConceptClick to Flip

Why is interest expense NOT deducted when calculating Free Cash Flow to Firm (FCFF)?

Reveal Definition / Answer ↓

Because FCFF belongs to all capital providers (debt and equity). Interest expense is a return to debt holders and is accounted for in the discount rate (WACC), not in the cash flow numerator.

Conceptual Check / QuizActive Recall

Discounted Cash Flow (DCF) & WACC Corporate Valuation