Calculating Free Cash Flow to the Firm: Method #2: Cash Flow From Operations
February 12, 2025
Companies that file for bankruptcy also have a capital structure just like normal companies. This means that their capital structure is comprised of debt as well as equity. In the past few articles, we have been continuously talking about the interests of the debt holders i.e., how they will get paid in the event of […]
In the previous article, we learned about what a digital depository system is and how it functions. We also understood the roles and responsibilities played by each participant in the system. In this article, we will continue to understand the depository system further. We will have a look at some of the functions which are […]
The $4 trillion dollar Forex market witnesses a lot of market participants. However, all of these participants have different motives. An understanding of these motives is required to predict their behavior in the markets. Also, some of these participants have deeper pockets, better information and are more active than the others. Therefore, any student of […]
In the previous article, we have already learned about the “Proof of Work” mechanism which underpins Bitcoin and many other major cryptocurrencies across the world. In any proof of work-based cryptocurrency, every transaction is validated by a miner. The transaction gets added to the blockchain only after such a validation takes place. However, we also […]
We often read about how electronic and software based trading is the norm in stock or equity markets as well as currency and other financial markets. Indeed, anyone who is remotely connected with the stock market or for that matter any financial market would know that there are trading systems and trading software that help […]
In corporate finance we studied that companies had an option when it came to compensating their equity shareholders. They could both pay these shareholders cash dividends from the earnings of the current year or alternatively they could conduct a share repurchase program and buy back some shares from the same proceeds. The monetary effect would be the exact same. Differences, if any would arise because of the taxation policy of the particular country.
However, when it comes to valuation, there is a huge difference between cash dividends and share repurchase programs. However, some organizations prefer to conduct share repurchases. Hence, as an analyst it is important to understand how share repurchase affects the value of a company.
This article explains the same in great detail:
Therefore, share repurchase programs are not as reliable or as consistent as dividend payout programs. However, companies may indulge in these transactions and valuations have to be conducted.
When dealing with share repurchase, the analyst may have to go beyond per share data. This is because the number of shares outstanding keeps on changing and hence per share data from last year may not be comparable to this year’s numbers. Here are the steps commonly followed while valuing share repurchases:
To sum it up, the procedure largely depends on forecasting what the share price will be in the future. In the near future, an educated guess is still possible. However, predicting the stock price 5 or 10 years hence is sheer speculation and it is for this reason that analysts face problems arriving at a valuation for companies which use share repurchase as a tool to reward equity shareholders
Your email address will not be published. Required fields are marked *