Page 20 - FINAL CFA II SLIDES JUNE 2019 DAY 8

LOS 31.m: Explain alternative definitions of cash READING 31: MARKET-BASED VALUATION: PRICE AND
flow used in price and enterprise value (EV) ENTERPRISE VALUE MULTIPLES
multiples and describe limitations of each
definition – 4 Types! MODULE 31.4: EV AND OTHER ASPECTS

Expect to see any in the exam!
4 Types of Cash Flows (CFs) used in P/CF (multiples) ratio:

1. Earnings – plus - noncash-charges (CF) (ignores non cash revenue, changes in working capital);

2. Adjusted cash flow (adjusted CFO) (US GAAP requires I-paid, I-Received & Dividends as OCS but IFRS is flexible)

3. Free cash flow to equity (FCFE) (more volatile than straight cash flows); and

4. Earnings before interest, taxes, depreciation, and amortization (EBITDA) (better suited for total company value than equity value).

Analysts typically use trailing price to cash flow ratio, which relies on the most recent four quarters of cash flow per share.

EXAMPLE: Calculating P/CF: Data Management Systems, Inc., (DMS) reported net income of $32 million, depreciation and
amortization of $41 million, net interest expense of $12 million, and cash flow from operations of $44 million. The tax rate is
30%. Calculate the P/CF ratio using earnings-plus-non-cash-charges (CF) as a proxy for cash flow. DMS has 25 million shares
of common stock outstanding, trading at $47 per share.