[Verse 1] Picture a company like a treasure chest Before the bankers claim their interest payments We calculate the gold that flows unrestricted Free Cash Flow to the Firm, pure and untwisted Start with earnings, add back depreciation Subtract the taxes, capital expenditures waiting Working capital changes steal some away What's left belongs to everyone who's got a stake to play [Chorus] FCFF, the cash flows free Before we pay the debt, what do we really see? Discount it back with WACC, the weighted average cost Enterprise value found, no financing details lost FCFF, the total prize Subtract the debt to find the equity's true size [Verse 2] Operating income after taxes paid Add depreciation back, it's just accounting's charade CapEx steals cash for future growth Working capital swings, both blessing and oath When inventory climbs or receivables grow That's cash trapped inside with nowhere to go But payables rising gives us breathing room Free cash calculation starts to bloom [Chorus] FCFF, the cash flows free Before we pay the debt, what do we really see? Discount it back with WACC, the weighted average cost Enterprise value found, no financing details lost FCFF, the total prize Subtract the debt to find the equity's true size [Bridge] WACC weighs the cost of every dollar raised Equity and debt in proportions praised Risk-free rate plus beta times the market premium Cost of debt adjusted for the tax delirium Terminal value captures cash beyond our forecast years Growth rate locked in perpetuity's gears [Verse 3] Now we've got enterprise value in our hands The whole company's worth across all lands But shareholders don't own it all alone Bondholders have claims, debts to atone Subtract net debt and preferred equity too What remains is common stock's value true From firm-wide flows to shareholder's slice FCFF method cuts through valuation's ice [Chorus] FCFF, the cash flows free Before we pay the debt, what do we really see? Discount it back with WACC, the weighted average cost Enterprise value found, no financing details lost FCFF, the total prize Subtract the debt to find the equity's true size [Outro] When financing structures cloud your view FCFF cuts straight through Enterprise first, then equity's share Valuation clarity beyond compare
← Free Cash Flow to Equity Model | Residual Income Valuation →