Microsoft Word peachtree case study
Economic Income Flow Development
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| 5.2.1 Economic Income Flow Development Equity and Invested Capital Considerations Net after‐tax cash flows are generally measured in two ways. Net cash flow to equity measures the cash flow available (or return of/on equity) to shareholders or equity interest holders, in effect representing the dividend‐paying capacity of the subject. Recall that one of the eight primary business valuation considerations described in Revenue Ruling 59‐60 is the dividend‐paying capacity of the subject. Generally speaking, the cash return to non‐equity subject company participants (e.g., debt and preferred stockholders) is deducted from net cash flow to equity as well as consideration for other business needs and any non‐cash transactions. The result of using the net cash flow to equity indicates the equity value of the subject being appraised. However, when the net cash flow available is measured before any consideration has been given to non‐common equity financing arrangements, the net cash flow Companies, 4th Edition, written by Shannon P. Pratt, Robert F. Reilly, and Robert P. Schweihs. New York McGraw‐ Hill, 2000, p. 208. Page 97 of 141 is said to be on an invested capital basis. In other words, using a net cash flow to invested capital model removes the impact of how the subject was capitalized (i.e., the subject’s debt/equity structure. Formulaically, all debt‐related costs incurred are added back to the net cash flow to equity figure to determine the amount of cash available to both equity investors and debt participants (i.e., the capital providers to the subject. In order to determine the equity value of the subject when using the net cash flow to invested capital model, the fair market value (or other appropriate standard of value) of the debt (all forms including preferred stock and traditional lending structures) must be subtracted from the total enterprise value (equity and debt) calculated to arrive at the equity value of the subject. Download 0.84 Mb. Share with your friends:
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