Self-Study
4
Intermediate
Management 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 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

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 Services
Aug 25, 2017
Basic familiarity with business metrics or cash flow accounting.
SS3175180
120
None


Compliance Information

103220
Qualifies for CA Fraud: No


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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