Management Adv Services
Basic familiarity with business metrics or cash flow accounting.

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 effectively and 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.


Richard Malekian, MBA

Richard Malekian, MBA, is the president of Shareholder Value Consultants, Inc., a management consulting firm specializing in helping client companies create value for shareholders through the implementation of economic profit and free cash flow programs. Those programs include the installation of financial management frameworks within client companies based on economic profit and free cash flow, and the creation of management incentive compensation programs that are linked to those metrics.

His client experience covers several industries, including manufacturing services, airlines, chemicals, information technology, retailing, consumer products, and utilities. Prior to founding Shareholder Value Consultants, Richard was a director in the Shareholder Value Management group at PricewaterhouseCoopers and was also vice president at Stern Stewart & Company. Earlier in his career, he served as vice president within the Corporate Finance Group at American Express. His educational background includes an MBA in finance from New York University, and a BS in finance from the Wharton School of Business at the University of Pennsylvania.

Course Specifics

Management Adv Services
Aug 18, 2016
Basic familiarity with business metrics or cash flow accounting.

Compliance Information

Qualifies for CA Fraud: No

Learning Objectives

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

Chapter 1

  • Identify why the traditional assessment of a business by net income or loss is inadequate for determining value creation.
  • Define free cash flow.
  • Recognize the difference between the free cash flow framework and the traditional accounting framework.
  • Calculate net operating profit after taxes and define net investment.
  • Identify the connection between free cash flow and value creation.
  • Identify how to enhance free cash flow over the long term and interpret the effects various expenses have on the free cash flow calculation.
  • Recognize the steps to adjust the income statement and balance sheet to calculate free cash flow.

Chapter 2

  • Recognize the usefulness of disaggregating the free cash flow metric in the maximization of free cash flow.
  • Identify measurements used to evaluate and manage performance of free cash flow drivers and explain how to use them.

Chapter 3

  • Recognize the cost of capital and its variations.
  • Calculate after-tax interest expense.
  • Cite the relationship of the cost of equity capital to a stock's beta.
  • Identify the market risk premium to the market portfolio return.
  • Calculate an investment's cost of equity according to the capital asset pricing model.
  • Calculate a company's weighted average cost of capital.

Chapter 4

  • Identify factors to be considered when performing a proper capital budgeting analysis.
  • Calculate net present value of free cash flow with no terminal value.
  • Calculate net present value of free cash flow using the cash flow perpetuity method and the constant growth method.

Chapter 5

  • Recognize interim value creation results of free cash flow analysis.
  • Identify value creation efforts using the modified free cash flow approach.
  • Calculate modified free cash flow and market value by using the modified free cash flow method.
  • Identify negative modified free cash flow for strategic investments.

Chapter 6

  • Recognize acquisition costs and benefits.
  • Calculate the stand-alone value of a possible acquisition.
  • Identify bid value of an acquisition.

Chapter 7

  • Identify goals of and maximize the performance standard with incentive compensation plans.
  • Recognize various incentive plans and compare them to one another.
  • Calculate bonus bank transactions.

Chapter 8

  • Recognize the level of integration and calculation of the free cash flow metric for successful implementation.
  • Cite the importance of communication and training in the implementation of the free cash flow metric.

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



Final Examination

Answer Sheet

Course Evaluation

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