Finance Topic Cash Flows

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00:00:00 Start • 00:00:50 Video Outline • 00:02:55 Review of Income Statement • 00:04:35 EBITDA • 00:06:30 What does Net Income (NI) mean? • 00:08:05 NI is an accounting business performance metric • 00:08:32 Financial assets value is derived from a contractual claim and is equal to the present value of expected cash flows • 00:09:01 Example of Earnings vs Cash Flow • 00:10:38 Profit is an opinion, cash is a fact • 00:11:48 Earnings - Opinion on SINGLE PERIOD Operational Efficiency • 00:12:13 Earnings based on on-going concern accounting philosophy, focus on appearance of stability and continuity. • 00:12:52 Accounting CPA's concerned about Consistency, Perspective, and Appearance • 00:13:02 Earnings is a smoothing type number that reflects the work that was done in a period • 00:13:26 Present value of cash flows measures CROSS PERIOD economic Effectiveness • 00:19:45 Present value of cash flows takes into account timing of cash flows • 00:21:06 Earnings the same between both Scenarios, but one is creating value the other is destroying value • 00:22:15 Take holistic view of company • 00:23:02 Comparison Balance Sheet • 00:25:02 Cash Flow Statement styles • 00:25:24 Direct Method style • 00:26:28 Indirect Method style - reconciles NI with cash flow • 00:27:22 Indirect Method details - T account worksheet • 00:28:15 Assets = Cash + Non-Cash Assets = Liabilities + Owners Equity • 00:29:55 Indirect Method layout - Sources/Uses, Operations/Financing/Investing • 00:33:25 Change in cash • 00:34:18 Operations section reflects changes in working capital that highlights the difference between NI and cash flow • 00:35:10 Cash Flow terms: Change in cash, Cash Flow, Free Cash Flow (FCF), FCFE, FCFF • 00:35:20 CF is Cash Flow from operations, organic cash generation • 00:36:02 Change in Cash is net change in cash at bottom of Cash Flow Statement • 00:36:30 FCF = CF - CapEx. Operational cash flow left after CapEx investments. • 00:37:12 FCFE = NI + Depreciation - CapEx - Change in Non-cash Working Capital + Net Debt= NI(1-%) • 00:37:20 FCFE = FCF + Net Debt • 00:37:48 FCFE (aka Potential dividend ) = Change in cash + Dividends + Net Equity Repurchase • 00:39:18 Equity valuation based on FCFE, discount using Cost of Equity (CoE) • 00:39:50 FCFF = NOI(1-T) + Depreciation - CapEx - Change in Non-cash Working Capital • 00:40:21 NOPLAT (Net Operating Profit Less Adjusted Taxes) same as NOI(1-T) • 00:41:13 FCFF = FCFE + (rD - iS)(1-T), working from bottom of Income Statement • 00:41:41 Enterprise valuation based on FCFF, discount using Weighted Average Cost of Capital (WACC) • 00:42:15 Enterprise value - Debt + Cash = Equity Value • 00:43:11 Tradeoffs of determining Equity value with FCFE vs FCFF • 00:45:00 Static Theory of Capital Structure derived from Modigliani and Miller propositions • 00:46:51 Operating lease capitalization (convert to debt) - moot point for Equity Valuation • 00:49:10 Calculating WACC adds complexity. WACC = CoE(Equity/(Equity+Debt))+b(1-T)(Debt/(Equity+Debt)) • 00:50:20 Cash Flow Comparisons - EBITDA, Change in cash, CF, FCF, FCFE, FCFF • 00:52:15 Other Cash Flow terms - Unlevered FCF, Levered FCF, Distributable Cash Flow • 00:53:40 Cash flows used by Polaris valuation formula • 00:54:40 Polaris valuation formula • 00:54:45 Cash flows used by Polaris equivalent to FCFE • 00:56:02 FCFE (aka Potential distribution ) = Change in cash + Dividends + Net Equity Repurchase • 00:57:10 Equivalent approaches to handling Change in cash - Damodaran (yearly cash flows) or McKinsey (CapEx) • 01:01:55 Polaris uses McKinsey approach where project of cash is reflected in the future Profit Margin which when multiplied by Sales growth is future Earnings • 01:02:24 Equivalent approaches to handling Stock Repurchases - do nothing or reflect in outstanding shares • 01:02:35 Polaris uses the modification of outstanding shares approach • 01:03:05 Share Count Confusion blog on Damodaran's Musing on Markets • 01:04:25 FCFE = Dividend, using Mckinsey Change in cash approach and change of outstanding shares • 01:05:45 Wrap-Up

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