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Course Description
Free Cash Flow: A Powerful Decision-Making Metric compares the free cash flow metric with other common investment strategies and demonstrates its superiority for measuring shareholder value creation. Learn how to use free cash flow to maximize shareholder value by evaluating both capital budgeting and acquisition opportunities. Additional topics include financial drivers (or component building blocks) of free cash flow, frameworks for designing an incentive compensation program linked to free cash flow, and the interrelationship between cost of capital and return on investment.
Instructor
Learning Objectives
Upon successful completion of this course, participants will be able to:
Chapter 1
- Define free cash flow and terminology associated with the performance metric
- Recognize the structure and components of a free cash flow framework, identifying major areas where this type of framework differs from a traditional accounting framework
- Recognize a basic cash flow calculation, and identify the characteristics of the measurement components
- Note the relationship between market value and free cash flow as well as the relationship between Return on Investment and Cost of Capital
- Cite the purpose of financial statement adjustments and identify the kinds of adjustments to be made as well as the impact on NOPAT and invested capital
Chapter 2
- Recognize the purpose and goals of disaggregating the free cash flow metric into its component parts
- Identify measurements used to evaluate and manage the performance of free cash flow drivers, noting the objective of linking the measurements to one another
Chapter 3
- Recognize the attributes of cost of debt capital and cost of equity capital
- Define beta and what it measures
- Recognize what market risk premium and market portfolio represent
- Identify the components and appropriate usage of the capital asset pricing model
- Define weighted average cost of capital and identify its characteristics and usage
- Calculate after-tax interest expense, cost of equity, and a security’s market risk premium in a given set of circumstances
Chapter 4
- Define net present value and identify the results of a positive, negative, and net present value of zero
- Cite the reason why a discount rate for an investment project can differ from a company’s current cost of capital
- Define terminal value and identify ways to quantify the dollar amount of a terminal value
- Calculate net present value of free cash flow given a set of circumstances
Chapter 5
- Recognize the defining characteristics of the modified free cash flow approach, noting its value creation impact over the short to intermediate term
- Calculate modified free cash flow and market value by using the modified free cash flow method
- Note the relationship between market value and modified free cash flow
Chapter 6
- Identify the components and framework of a free cash flow acquisition analysis as well as what the results indicate
- Calculate the stand-alone value of a possible acquisition
- Determine the bid value of an acquisition given a set of circumstances
Chapter 7
- Identify the components of a traditional incentive compensation and a free cash flow-based incentive plan, noting the applicable benefits, drawbacks, and ricks of each
Chapter 8
- Specify potential free cash flow implementation issues and cite possible ways to address these issues
Table of Contents
Chapter 1 – Introduction to Free Cash Flow
Learning Objectives
Traditional Financial Management Framework
Other Popular Performance Measures and Their Shortcomings
Free Cash Flow
Free Cash Flow (FCF) = Net Operating Profit after Taxes (NOPAT) – Change in Net Investment
Free Cash Flow (FCF) = After Tax Interest Expense + Debt Repayment + Dividends + Share Repurchase + Change in Marketable Securities
Free Cash Flow Framework
Free Cash Flow (More Detail on the Calculation)
Relationship between Market Value and Free Cash Flow Example
Relationship between Return on Investment and Cost of Capital
Optimal Investment Horizon
How to Enhance Free Cash Flow over the Long Term
Financial Statement Adjustments
Chapter 1 – Review Questions
Chapter 2 – Financial Drivers
Learning Objectives
A Company Must Optimize Performance of Free Cash Flow Drivers at the Operating Level
Free Cash Flow Can be Operationalized by Understanding the Components…
…And Developing Financial and Nonfinancial Measurements to Evaluate and Manage Performance
To Set Appropriate Goals, Management Must Identify How Measurements Link to One Another…
Chapter 2 – Review Questions
Chapter 3 – Cost of Capital
Learning Objectives
Cost of Debt Capital
Cost of Equity Capital
Weighted Average Cost of Capital
Cost of Capital Pitfalls
Chapter 3 – Review Questions
Chapter 4 – Free Cash Flow and Capital Budgeting
Learning Objectives
Free Cash Flow Formulas for Capital Budgeting
Terminal Value
Perpetuity Method
Terminal Value: Constant Growth Method
Chapter 4 – Review Questions
Chapter 5 – Free Cash Flow and Interim Financial Results
Learning Objectives
Free Cash Flow Analysis: Example I
Free Cash Flow Analysis: Example II
Modified Free Cash Flow
FCF versus Modified FCF
FCF versus Modified FCF: Scenario I
FCF versus Modified FCF: Scenario II
FCF versus Modified FCF: Scenario III
Relationship between Market Value and Modified Free Cash Flow
Strategic Investments
Chapter 5 – Review Questions
Chapter 6 – Free Cash Flow and Acquisition Analysis
Learning Objectives
Historical Perspective on Acquisitions
Free Cash Flow Acquisition Analysis
Free Cash Flow Acquisition Framework
Step 1: Analysis of Value Received
Step 1: Stand-Alone Value
Step 1: Synergies
Step 2: Analysis of Purchase Price
Impact of Purchase Price on Free Cash Flow
Chapter 6 – Review Questions
Chapter 7 – Free Cash Flow and Incentive Compensation
Learning Objectives
Typical Incentive Compensation Plan
Incentive Compensation: A Better Solution
Possible Free Cash Flow-Based Incentive Programs
Free Cash Flow Bonus Plan
Components of Incentive Compensation Plan
Incentive Plan: Component Parts
Sharing Percentage and Risk
Bonus Bank
Sample Bonus Bank
Chapter 7 – Review Questions
Chapter 8 – Implementation Issues
Learning Objectives
Specific Implementation Issues
Chapter 8 – Review Questions
Review Question Answers and Rationales
Glossary
Index
Final Examination
Answer Sheet
Course Evaluation
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