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Business Valuation Methods - Coggle Diagram
Business Valuation Methods
Free Cash Flow (FCF)
Core Characteristics
Cash flow available to both debt and equity holders after operational expenses and taxes.
Discount Rates Used
Discounted at WACC reflects both debt and equity costs
Treatment of Taxes, Debt, and Leverage
Taxes are accounted for explicitly; debt impacts WACC but cash flows are independent of capital structure.
Advantages and Disadvantages
More common in business valuation but depends on accurate WACC estimates.
Capital Cash Flow (CCF)
Core Characteristics
Includes tax shields from interest payments.
Discount Rates Used
Discounted at pre-tax WACC or unlevered cost of capital since it includes tax shields explicitly.
Treatment of Taxes, Debt, and Leverage
Interest tax shield is included in cash flow, so a pre-tax WACC is used.
Advantages and Disadvantages
Useful when capital structure varies but less frequently used in practice.
Equity Cash Flow (ECF)
Core Characteristics
Cash flow available to shareholders after all debt obligations.
Discount Rates Used
Discounted at Cost of Equity (Ke) since it represents cash available to shareholders
Treatment of Taxes, Debt, and Leverage
Interest and debt payments are deducted before deriving cash flows.
Advantages and Disadvantages
More direct for equity investors but ignores debt value.