4.1 Cash Flow

Loading...

From the course by Yonsei University

Valuation for Startups Using Multiple Approach

49 ratings

Yonsei University

Valuation for Startups Using Multiple Approach

49 ratings

Course 2 of 5 in the Specialization Valuation and Financial Analysis For Startups

In addition to discounted cash flow method, multiple method is one of the most popular methods of firm valuation. PER is often used among financial professionals to make a quick-and-dirty estimate of a firm value. In this course, you are going to learn the concept and usage of PER, PBR and PSR. In addition to these basic multiple ratios, you are going to learn how to make an estimate of enterprise value and founder’s ownership before and after additional funding. Startups require a number of financings before IPO. After taking this course, you are going to be able to answer questions such as What the price per share should be given the startup’s estimate of earnings in the future; How many shares the founder should give up to raise additional capital; and so on? In the discounted cash flow method and multiple method, you are always given earnings or cash flows to make estimate of firm value. In this course, you are also going to learn how to generate cash flows or earnings from the financial statements. After taking this course, you will be able to understand the meaning of financial statements such as balance sheet, income statement and cash flow calculation.

From the lesson

Cash Flow

In this module, you will learn cash flow identity which consists of cash flow to assets and cash flow to creditors and stockholders. Furthermore, you are able to calculate cash flow. Basically, this module is strongly related to module 3, financial statements. Students are encouraged to review all contents in module 3. Lastly, wrap-up review lecture are provided.

4.1 Cash Flow7:38

4.2 Cash Flow Calculation5:35

Meet the Instructors

Hyun Han Shin
Professor
School of Business

Hi everybody.

In this class we are going to learn one of the most important concepts of finance,

that is cash flow.

We are going to learn how to determine this cash flow.

We know that the value of a firms assets is equal to the sum of the value of it's

liabilities and equity, and it is called the balance sheet identity.

Similarly the cash flow from the firms assets must equal the sum of the cash

flow to creditors and cash flow to stockholders or owners.

This is called the cash flow identity.

Cash flow from assets include three components.

Operating cash flow, capital spending, and change in net working capital.

Operating cash flow refers to the cash flow from the firm's

day to day operations.

It is important to note that expenses, such as interest, are not included in

the operating cash flow, because they are not operating expenses.

Capital spending means purchases of fixed assets minus sales

of fixed assets, that is net spending on fixed assets.

Change in net working capital is the amount spent on net working capital.

As we learned already, net working capital is the difference between

the current assets and current liabilities.

In order to calculate operating cash flow we have to add

depreciation to earnings before interest and taxes.

Since depreciation is not a cash outflow, but

we have to subtract taxes from EBIT, because taxes are actual cash outflows.

For example, if EBIT is $1,000 depreciation is $100 and

tax is $200, then operating cash flow is $900.

Negative operating cash flow means that a firm's cash

inflow is less than its cash outflow, so it is a sign of trouble.

In finance, operating cash flow is measured as EBIT + Dep- Taxes.

But in accounting, operating cash flow is net income plus depreciation.

So it is important to note that the accounting definition of operating

cash flow considers interest paid to the operating expense.

While the financial definition of operating cash flow treats interest as

a financing expense

In order to find cash flow from assets we need to find capital spending too.

Net capital spending is money you spent on fixed assets

minus money received from the sale of fixed assets.

Net capital spending equation is from the following equation,

that is, ending net fixed assets is equal to beginning net

fixed assets minus depreciation plus net capital spending.

Rearranging this equation to solve for net capital spending, we can get

the equation for net capital spending as, net capital spending is equal to

ending net fixed assets minus beginning net fixed assets plus depreciation.

Let's take a look at an example.

Suppose a firm's ending net fixed asset is $1,000, beginning net fixed asset is $900.

Depreciation is $100.

Then net capital spending is $1,000 minus $900 plus $100 is equal to $200.

Net capital spending could be negative if

ending net fixed assets are smaller than beginning net fixed assets.

That is firm sold more assets than it purchased.

However, in most cases ending net fixed assets

are greater than the beginning net fixed assets.

Whether it is negative or positive,

net capital spending is often called CAPEX or capital expenditures.

In addition to investing in fixed assets, a firm will also invest in current assets.

For example, suppose Walmart opens a new store in New York.

Walmart has to fill the new store with new inventory.

Even though part of the inventory can be financed by suppliers credit,

not all of inventory can be sold within the credit period.

Then part of the inventory should be financed by Walmart’s own capital.

This is an increase in net working capital.

We can find change in Net Working Capital by taking the difference between

the beginning and ending Net Working Capital.

For example, suppose a firm has ending Net Working Capital of $500 And

beginning net working capital of $400.

Then change in net working capital is $500 minus $400 is equal to $100.

Given the figure we have come up with we can calculate cashflow from assets.

Operating cashflow is $900.

Net capital spending is $200.

Change in net working capital is 100.

So cash flow from assets is $900 minus $200 minus $100 is equal to $600.

Next, let's talk about cash flow to creditors and owners.

The cash flows to creditors and owners mean net payment to creditors and

owners during the year.

We can find cash flows to creditors from interest paid minus net new borrowing.

For example, suppose a company paid $100 of interest and

long-term debt grows from $400 to $450.

Then firms net new borrowing is 450 minus 400 is

equal to $50, and interest paid is $100.

So the cash flow to creditor is 100 minus 50 is

equal to $50.

The cash flow to stockholders is dividends paid to stockholders minus net new equity.

For example, suppose a company paid $600 of dividend,

and its beginning equity was $1,000 and ending equity is $1,050.

Then cash flow to stockholders is dividends of $600

minus net new equity of 50, so it is $550.

From the previous class we know that cash flow from assets is $600.

Cash flow to creditors and stockholders is $50 plus $550 equal to $600.

So we make sure that cash flow identity holds true.

Explore our Catalog

Join for free and get personalized recommendations, updates and offers.

Coursera provides universal access to the world’s best education, partnering with top universities and organizations to offer courses online.

© 2019 Coursera Inc. All rights reserved.

Download on the App Store

Get it on Google Play