Steps in Cash Flow Estimation

Estimate the current earnings of the firm
• If looking at cash flows to equity, look at earnings after interest expenses - i.e. net income
• If looking at cash flows to the firm, look at operating earnings after taxes

Consider how much the firm invested to create future growth
• If the investment is not expensed, it will be categorized as capital expenditures. To the extent that depreciation provides a cash flow, it will cover some of these expenditures.
• Increasing working capital needs are also investments for future growth
If looking at cash flows to equity, consider the cash flows from net debt issues (debt issued - debt repaid)

Measuring Cash Flows

Measuring Cash Flow to the Firm


EBIT ( 1 - tax rate)
- (Capital Expenditures - Depreciation)
- Change in Working Capital
= Cash flow to the firm
Where are the tax savings from interest payments in this cash flow?


From Reported to Actual Earnings