Free cash flow is operating cash flow minus cash outlays for operating capacity like buildings, equipment, and furnishings. A company's free cash flow thus represents the amount available to finance planned expansion of operating capacity, to reduce debt, to pay dividends, or to repurchase stock. Under the free cash flow approach to valuation, the price of the stock at time = 0, P0 , is equal to the sum of the future stream of expected free cash flow per share discounted back to the present at the firm's cost of equity capital.

Multiplying the estimated stock price, P0, by the number of common shares outstanding produces an estimate of the total common equity value of the company. Simply put, the free cash flow model expresses today's market value of each common share as a function of investors' current expectations of the firm's future economic prospects as measured by its expected future free cash flows.

Please discuss the following question in detail:

1- Describe the role of accounting numbers in corporate valuation.

2-P/E ratios are a useful indicator and tool when performing valuation and comparing firms. List three factors that should be considered or adjusted for when comparing P/E ratios among different firms.

3-.What is meant by sustainable earnings?

Answer rating: 100% (QA)

The Cash Flow Case Study Roles of Accounting Numbers in Corporate Valuation The process of determining the economic value of a corporation is known as evaluation The valuation can be used to determine ... View the full answer