Page 45 - FINAL CFA II SLIDES JUNE 2019 DAY 8

LOS 33.e: Explain cash flow estimation issues READING 33: PRIVATE COMPANYVALUATION
related to private companies and adjustments
required to estimate normalized earnings.
MODULE 33.2: INCOME-BASED VALUATION

EXAMPLE: Estimation of FCFF: An analyst has normalized the
earnings and expenses for a private firm under consideration as an
acquisition. Because the capital structure is non-optimal, the analyst
assumes that the capital structure will be changed if the firm is
acquired and will use the FCFF approach to value the firm.
The following assumptions are used to create a pro forma income
statement and to estimate FCFF.

Additionally, capital expenditures will cover depreciation plus 6% of
the firm’s incremental revenues. Create a pro forma income
statement and estimate FCFF.