3.11: Free cashflow
Free cashflow is one of the key components used by business valuators to calculate Enterprise Value using the capitalized cashflow method. Free cashflow represents projected discretionary cashflow before allocation to the providers of long-term capital, i.e. long-term lenders and shareholders. (Enterprise value is the value of the operating business – see discussion at https://valuationsandplanning.com/understanding-business-valuators-reports/4-6-enterprise-value/).
A simple example best illustrates how free cashflow is determined. Note the treatment of amortization and sustaining capital expenditures:
Free cashflow is the cashflow available to the enterprise before allocating to the providers of capital. By capitalizing free cashflow using an appropriate capitalization rate a business valuator determines Enterprise Value.
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