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The Basics: Creating Shareholder Value Using Free Cash Flow & Economic Profit

NASBA Field of Study:

Finance

3 CPE Credits

Prerequisites:

Experience with basic free cash flow, economic profit, and capital budgeting concepts.

Advance Preparation:

Review "Technical Requirements/Support."

Level:

Intermediate

Course Description

This course will demonstrate how to use free cash flow and economic profit as business management tools to create value for shareholders. You will learn why both free cash flow and economic profit are superior to net income in evaluating business performance, and how to use these concepts to analyze current and future investment opportunities. You’ll also learn how to:
• Incorporate return on investment into free cash flow and economic profit analysis
• Create and optimize the drivers of free cash flow and economic profit
• Calculate the weighted average cost of capital for a company using the cost of debt capital and the cost of equity capital

You will gain the ability to use free cash flow and economic profit to analyze how your business decisions impact the economic value of the firm. Managers will be able to answer questions that all businesses face on a day to day basis such as:
• What is the value of my current business operations?
• Should I invest in new manufacturing capacity now in order to meet future demand?
• Should I divest certain existing businesses today, and how will that impact corporate value?

This course will provide the free cash flow and economic profit tools that a business professional will need to compete effectively in an economy that is fast moving, and ever changing. You can add to your knowledge base with Creating Shareholder Value Using Free Cash Flow & Economic Profits – Beyond the Basics.

Learning Objectives

Upon successful completion of this course, participants will be able to:

Evaluate why net income, EBITDA, and cash flow from operations are flawed measures of shareholder value creation
Determine the three specific shortfalls of net income as a measure of company performance
Define Free Cash Flow and Economic Profit and describe why they are superior performance metrics for determining shareholder value creation
Calculate net operating profit after taxes and invested capital as components of Free Cash Flow and Economic Profit
Determine what return on investment is and how this calculation is used in comparison to cost of capital
Understand the idea of optimal investment horizon and how this concept can be used to make future investment or disinvestment decisions
Explain how sub-component value drivers of Free Cash Flow and Economic Profit can be used to engage all company personnel in the process of value creation
Illustrate why the value drivers within a company need to be optimized and not maximized in order to avoid misallocation of resources.
Discuss the importance of cost of capital in deciding whether a company is creating or destroying shareholder value
Describe the differences between debt capital and equity capital, and why the cost of debt capital is explicit while the cost of equity capital is implicit
Calculate the cost of equity capital using the Capital Asset Pricing Model and describe why this methodology for calculating cost of equity capital is superior to traditional methods
Calculate the weighted average cost of capital using debt capital and equity capital weights
Emphasize why it is important to separate the investment decision from the financing decision when evaluating where to deploy capital
Illustrate why a blended cost of capital approach should always be used to evaluate an investment opportunity irrespective of the actual financing used