FORECASTING CASH FLOWS

Statement of Financial Situation (Balance Sheet) Cash Accounts Receivables Inventory

Assets (Use of Funds) Investments Investments are expected to produce cash flows to pay debtholders and shareholders

Accounts Payables Tax Payable Payroll Payable Short-Term Debt

Long-Term Debt

Liabilities and Equity (Sources of Funds) Debt-holders and shareholders expect a return for their contribution

Fixed Assets (Long-Term Assets)

Capital Contributions Retained Earnings Current Earnings

To forecast ability of investments to produce cash flows we must first forecast earnings.

FORECASTING CASH FLOWS

Statement of Financial Situation (Balance Sheet) Working Capital
Assets (Use of Funds) Investments Investments are expected to produce cash flows to pay debtholders and shareholders (Current Assets Current Liabilities)

Long-Term Debt

Liabilities and Equity (Sources of Funds) Debt-holders and shareholders expect a return for their contribution

Fixed Assets (Long-Term Assets) Capital Contributions Retained Earnings Current Earnings

To forecast ability of investments to produce cash flows we must first forecast earnings.

FORECASTING CASH FLOWS

Statement of Financial Situation (Balance Sheet) Cash Non- Cash Working Capital Long-Term Debt

Assets (Use of Funds) Investments Investments are expected to produce cash flows to pay debtholders and shareholders

Liabilities and Equity (Sources of Funds) Debt-holders and shareholders expect a return for their contribution

Fixed Assets (Long-Term Assets) Capital Contributions Retained Earnings Current Earnings

To forecast ability of investments to produce cash flows we must first forecast earnings.

INCOME STATEMENTS AND CASH FLOWS

Revenues Cost of Goods Sold = GROSS PROFIT - Selling, General & Administrative (SG&A) - Research & Development (R&D) = EARNINGS BEFORE INTEREST, TAX AND DEPRECIATION (EBITDA) - Depreciation & Amortization (D&A) = EARNINGS BEFORE INTEREST & TAXES (EBIT) - Interest Expenses - Tax Expense = NET INCOME

NET INCOME = (EBIT Int)(1-Tax) = EBIT(1-Tax) Int (1-Tax)

EBIT(1-Tax) = NOPAT EBIT = Operating Income (OI)

INCOME STATEMENTS AND CASH FLOWS

Plus Non-Cash Expenses Less Short-Term Investments

EBIT (1-Tax) Depreciation & Amortization INVESTMENTS IN WORKING CAPITAL +Change in Accounts Payables -Change in Accounts Receivable -Change in Inventories CAPITAL EXPENDITURE

Less Long-Term Investments

= FREE CASH FLOW FROM OPERATIONS

Do Free Cash Flows from Operations depend on how the firm is financed? At what rate should be discounted the Free Cash Flows from Operations ?