Session 7: Estimating Cash Flows

Goes through the steps in estimating cash flows, from measuring earnings to computing reinvestment and then on to cash flows (to both the firm and to equity).

[@jcao7985]

... never realized there are so many potholes that can crook the final valuation. Attention to details. Great advice. The best of the best video ... yet ad-free. Thank you.

[@dylanmcmanus3018]

This guy is a genius

[@theejucateddonkey]

No doubt

[@neilturner9160]

I made it to this video and decided this is a lot of work. I'll just ETF and chill. Thanks for the videos though lol.

[@xuanphucnguyen1212]

Tuyet voi qua, tran trong cam on thay. Special thanks from Vietnam

[@hrishikesh-s]

These videos are the assets I'm investing my time capital in :)

[@akshaykothari93]

I am assuming that the guy who disliked the video did it by mistake. Aswath Damodaran's lectures are really good :)

[@Kris-vlogsquad]

could be with smart phones you some times listen with phone in your pocket

[@Paltibenlaish]

are good, but I been listening to him for 5 hours and I don't fucking know how to do company valuation

[@tbaiyewu]

thanks a lot prof for your time. u answered all my questions

[@AlexVoxel]

If you want to look at the charts you can find them on the slides for this lesson on his website

[@valdiadams5787]

Could you put a link here?

[@narsubramanian]

He has the entire class and assignments on iTunesU, and yes it is free. It is awesome.

[@priyankpatelsmathssolution1743]

@@narsubramanian Is it availabe for android?

[@bro6046]

pages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/dcfcf.pdf

[@sushmitajoshi4111]

I was always interested in valuations, but never got a teacher who would explain things practically. I always wondered even as I completed my Chartered Accountancy about how to estimate cost of debt, the beta and all other estimates. And finally I am starting to understand things. They look complex, but there's no backing down. Thankyou for these lectures.

[@russianbismark8233]

Im a CA inter student. Never got an understanding as to why I was asked to calculate cashflows, wacc, discount rates, risk free rates, what betas were, and the list goes on. Thankfully i discovered professor’s channel and its been wonderful so far. I’ve started to appreciate these concepts even more. Revisiting my old notes now to get a fresh outlook

[@user-is3mv9ol8i]

Great explanations!

[@alcoholbyurrego]

Thanks for the video. it´s awesome. Like the way you build the cash flow is so easy to understand.

[@virajoswal4812]

Aswath sir thank you for the valuable information

[@Dan-DFD]

Thank you Sir!

[@shalomnjuguna1316]

Thank you for the lesson.

[@franalons0]

As a Finance student, i had trouble understanding many things. Thats on me though ):

[@aravinddhulipala9369]

It is mentioned as the lump sum amount should be compared to the average of all the previous payments. what should be the discount rate at which it has to be discounted to today's price?

[@quant-trader-010]

This is gold!

[@bickf4341]

Great lesson and awesome teacher, however, I found the part about amortizing R&D as an opex a bit unclear

[@shankarganeshk3367]

@Aswath You probably meant to show a Table of the calculation for SAP and Amgen, however, there was no Table shown in the Video. Is this an editing error? Is it possible to look at the supporting files with the SAP and Amgen data to understand this better? Thanks a ton for your efforts and your willingness to share your knowledge with us through this Video series.

[@siddheshchavan4192]

yes, even i have the same question. maybe he has the files on his website

[@pradeepjangid8979]

14:56 No chart is added, kindly add one

[@xcinvestment1231]

slides: people.stern.nyu.edu/adamodar/pdfiles/eqnotes/dcfcf.pdf

[@vijetarvindpatil7579]

Thanks Sir

[@dompatrick8114]

When calculating Pre-tax cost of debt, do I use net interest expense of just simply interest expense? I'm assuming just interest expense rate? To stay consistent with the 'Pre-tax' part.

[@touchmate123456]

Just Interest expense. You would eventually multiple the cost of debt with (1-Tax Rate) to arrive at Pre-Tax cost of debt in the WACC formula.

[@gurjotsingh9505]

What are the SAP's that professor has mentioned while capitalizing R&D expenses ?

[@kvkasus]

I have question, while calculating Free Cash flow to Equity, where in the financial statements can we find the value of principal repayments ?

[@matthewelsom9356]

kvk chaitanya cash flow statement in the financing section. Will be something along the lines of debt repaid

[@navinreddy1087]

Hi Aswath Sir, you said capitalizing leases would Increase the debt ratio and there by reduces the cost of capital. However when we capitalize leases it increases the debt ratio of the company so the cost of capital increases right? Investor might perceive high risk because of increase in debt ratio and would require higher cost of capital right?

[@priyankpatelsmathssolution1743]

Hello sir, are the images for your calcuations and examples available cause they are not present int the video?

[@sommojames]

Dummy questions, to calculate FCFE, I subtract CAPEX and add back depreciation to reflect the point in time such expenses occurred. For R&D therefore I should do nothing in this case, since being treated as opex, therefore already subtracted when determining net income. Amortization of R&ND was just for the purpose of calculation or return on capital. is this correct? Thanks a lot.

[@kambizkhosrowshahi1763]

Excellent lessons sir! Do you or anyone here recommend any book and workbook to go over everything?

[@kambizkhosrowshahi1763]

I found them! Many thanks!

[@pradeep200417]

@@kambizkhosrowshahi1763 Where?

[@kambizkhosrowshahi1763]

@@pradeep200417 Aswath Damodaran has a book called Investment Valuation; Also his youtube channel where he goes over each session with more detail...; and his website where you get all that info + tests and answers...; all the best!

[@daddymo7387]

@@kambizkhosrowshahi1763 salam khoobi shoma? doost darid dar morede stocks ba ham reseach konim? :)

[@t-dog6718]

i've looked up some retail companies and couldnt find any operating leases on their income statement. Some had the lease expenses on their balance sheet but that's were i want it to be, right?

[@AswathDamodaranonValuation]

Starting in 2019, accounting has come to its senses and leases are now capitalized and shown in the balance sheet. Even accountants are capable of learning, albeit slowly.

[@elontusk9123]

Would you count operating leases as debt when calculating leverage ratios?

[@anuragmedhane]

It seems logical to count it in debt as leverage ratios are used to assess the company's ability to meet its financial obligations and these operating leases are obligations as they are contractual commitments.

[@tobyadepoju]

@@anuragmedhane It’s noteworthy to express that “debt” are mostly interest bearing obligations. As such, it would be counter intuitive to include operating leases - which is, in the simplest term a non-interest bearing expense; as part of debt when calculating leverage ratios.

[@user-vx1nv1rj5n]

❤

[@priyamehta1883]

when we have to determine free cash flows than we need to deduct the R&D exp in year cash outflow is done. Why are we required to amortise R&D expense to get FCFF?

[@shreysanger]

Re. operating leases, while they are creating contractual commitment, are lease payments tax deductible? I don't think so, thus they don't pass the test of being called 'debt' as per the previous session. Any thoughts?

[@afonsotavaresdacruz740]

they are in the USA, in most European countries. Though may not be for others. If you want to add more detail to the valuation, you can check if the countries in which firms are operating treat leases as tax deductible expenses (fully or partially) and adjust in the same way that Damodaran suggests to estimate the cost of capital/debt, with weighted averages. Beware that data may not be accurate / sufficient for this, therefore an estimate would be the most likely usable number. Nonetheless, this could not be significant to the final valuation if the fraction of tax deductible leases is small whencompared with the remaining expenses.

[@JoaquinBS92]

Why we capitalize R&D creating an asset, subtracting its real cash impact and adding its depreciation? We are trying to estimate real cash flows, that's why we subtract capex and add back depreciation, but now we make the way around with R&D?

[@stefanobortolon6559]

R&D is consider as a CAPEX, it's like an investment that can generate positive cash flows in the future.

[@liu9045]

The slides of how to capitalize SAP's R&D are missing.

[@ISMFlowerShow]

This is more like a view of an public company analyst instead of actual cash flow analysis considering we have more than public information. Need some tweaks. So far the lectures have amazing though.

[@Mikster_Mindo]

Because it goes so much into detail I find it hard to keep overview of the main points.

[@salehabegum6121]

hlo sir, here I got some doubt y u have taken short term loan as a debt while calculating current liability as u have mentioned long term debt in the definition of debt.

[@aasthabisht3431]

Could anyone explain why FCFF are calculated as if the firm had no debt, i.e no tax benefit from interest payment?

[@maximerapoport2147]

I beleive its because the discount factor includes the tax shield benefits already

[@anuragmedhane]

Because its from the perspective of the firm. Just like while calculating FCFE, dividend payment is not deducted, while calculating FCFF, dividend + interest is not deducted. The tax benefit on interest part gets covered when calculating WACC when you multiply by (1-t).

[@AtanasNenov]

Think of it as free cash flow before paying the debt holders and equity holders (as it's all the free cash flow to the firm). As you haven't yet paid principal or interest to the debt holders, there is no tax shield yet to account for. Once you pay principal, interest and account for the tax shield, you'll then be looking at free cash flow to equity holders only.

[@steinadleradler3431]

where are the tables he is referring to?

[@stg134]

Hi sir.. In this video you have mentioned that FCFE contains principal repaid - new debt issued.. But some other notes you stated that new debt issued - principal repaid.. Which terms is exactly right...? Pls clarify

[@Urieleification]

FCFE = FCFF + (new debt issued - principal repayments) - Interests expenses x (1-t)

[@stg134]

Paolo Savarino thanks.. If you don't mind could you please explain how to find out new debt issued..? From which statement of account we can collect the information to calculate it..and what the components.. Please explain Paolo Savarino​

[@stg134]

Paolo Savarino​..

[@Urieleification]

The new debt issued can be in miscellaneous forms, for example it could be a new bond issued by the company, or a new bank loan which had be granted to it. Usually you can find track of those events in the financial report, you can see the increase in the numbers of these items. For example, consider the voice "long-term debts", if it was 10,000 in 2015 and 15,000 in 2016 it means that you had a new debt issuance of 5,000

[@dodgingdurangos924]

Paolo Savarino I thought FCFE = FCFF *minus* debt. Not *plus* debt. Was there a typo in your formula?

[@neysara]

After discounting the cash flows at the right discount rates, those cash flows must be multiplied by a factor, why? because a dollar in the hand of the company (, reinvested and not paid out as a dividend) is not worth the same as a dollar in the investor's pocket. it might be worth more or less.

[@kkrithika]

My lineage has long lives, like 90 yrs old etc. Could you or someone recommend info for a lower middle class female to save for old age, since the pension concept is not there anymore. Income is INR 2,40,000/- per annum.

[@501bafkenilavaiya9]

10.02 if we capitalize lease, the debt ratio increases which lowers the cost of capital. sir how an increase in debt ratio decreases the cost of capital?

[@GoldenAura32]

Cost of capital is figured with tax rate, you lower your income by debt interest payments. By increasing your interest payments you lower your overall income and therefore pay less effective tax therefore lowering your cost of capital.

[@mohamedshiri6174]

Debt is more cost-effective than equity when a significant portion of my capital is in the form of debt. Consequently, I should anticipate a lower cost of capital compared to a company whose capital primarily comprises equity + tax deductibility ofc

[@rushikeshbiradar493]

Where is the table?

[@soumyarathi5346]

Sir how can i study from you .

[@btcbenny21]

I am only understanding 60% of what he is saying but I get that Intrinsic value isn't easy as what warren buffet has said. He probably has 100 Aswath's working for him looking at which stocks to buy next. Warren buffet just needs to know a macro level of things which we all kind of know... It has come to my attention that ETFs are for the common investor...

[@sobriquet5016]

100%. Valuation is a skill set that you can learn, and probably no one teaches it better than Damodaran, yet it does take work. It's up to the individual to decide whether the effort required is worth it, or should they focus their time on other endeavours. If you choose the later path, then ETFs are probably the optimal investment decision for any excess or saved cash you may have.

[@IrineuEvangelista]

couldnt agree more

[@gauravbhayana4626]

Well the concepts are a bit hard to grasp on as a undergraduate but I try i think its advanced level that's why

[@aron5377]

Buffett has no staff helping him with security analysis except in-house auditors. He actually does it mostly on his own and says he pays no attention to macro trends because of the difficulty in predicting them.

[@devmoudgill2903]

@@aron5377 facts

[@value_investing]

Is he the people Peter Lynch called Oxymoron? Or Warren Buffet said it’s better be roughly right than precisely wrong? I don’t know. No wrong to gain deep knowledge though. Learned a lot anyway. Very appreciated!

[@chrisb481]

Professor Damodaran, when you refer to your tables for Amgen and SAP they dont show up on the screen. Did I miss something?

[@armandosillones2643]

12:31 youtube is falling asleep lol, great video, just a side jk

[@elainajohn8654]

It is mentioned as the lump sum amount should be compared to the average of all the previous payments. what should be the discount rate at which it has to be discounted to today's price?

[@ngongocuc3681]

Can you explain more and take examples about non-debt current liability ? Thank you Sir

[@truse1000]

Current liability in debt nature means it bears interest rate. Like short-term loan. He said he does not count such type of current liability in working capital calculation. Rather he uses this balance in cost of capital calculation.

[@weixinyuan3727]

Video seems to be missing some slides? There are a few times when he says "take a look at ..." and we are still looking at his face xD

[@cryptofein3888]

WHo else is trying to understand how to value a company so we can buy the dip?

[@sarahestupinan3665]

someone have the spanish traduction?

[@Don-uh1eb]

Why shouldn’t I just use the free cash flow that a company shows in their 10-Ks?

[@tech4028]

You're *projecting* cash flows. Not using historic cash flows. This is the whole point of investing. As an Investor you try to predict these FCFFs right. No company shows future FCFFs in their 10-Ks, and if they do, this would be public information (i.e. priced in by the market) or just very weird. Always do your own research

[@Don-uh1eb]

@@tech4028 Thank for your answer, what I meant is that the present or “starting” free cash flow is given to me by the company on its 10K but he insist on calculating that free cash flow himself.

[@tech4028]

@@Don-uh1eb Ah, i would still calculate it by myself since i want to be consistent with how i calculate it (1) and often when companies explicitly present FCF they do it because it "looks good" (2)

[@toreberli5533]

U lost me on the lease and RnD part :D

[@IntelligentStockInvesting]

A great video on how to overcomplicate investing

[@FrenkieJ01]

This is literally the basis of valuing companies, how can you say this is overcomplicating?

[@Proyekta.Solutions]

Its seem that is a part of the human condition to believe in our ability to make predictions and also quickly forget how stupid our predictions turn out to be. Valuation is a like econometrics. Is a big lie

[@vibhugoyal5798]

i don't know why everyone is giving such good reviews for these videos. i cannot understand thing of what he is trying to explain. It may be because i am from a non-finance background. But there must be practical examples involved to make the students understand stuff.

[@jordankolbert]

It's a video for finance students. You can't really expect to be spoonfed complex topics in finacne without knowing what the time value of money is.

[@kalyanpm6803]

Bruh, this is the best explanation on the whole frickin internet. If you dont understand this, 1. Either you have no clue about financial jargon (Since most of it is quite straightforward ) or 2. You aren't smart enough to break it down.

[@tech4028]

You‘re lacking fundamentals. Learn the foubdations first!

[@vanillakush4737]

@@tech4028 where coud i study fondamental? im laking aswell sir

[@tech4028]

@@vanillakush4737 look videos on accounting & try to do financial modelling in excel because its hands-on

[@elainajohn8654]

I made it to this video and decided this is a lot of work. I'll just ETF and chill. Thanks for the videos though lol.