Calculator · Cash-flow forecast
Free cash flow builder
Build free cash flow to the firm from a few drivers: revenue growth, operating margin, tax rate and the sales-to-capital ratio, then value it with a terminal value consistent with growth.
How the free cash flow is built
Following Damodaran, the forecast is driven by the story of the business: revenue growth fades from the high-growth rate to the stable rate, the operating margin moves to a target, the tax rate moves from the effective to the marginal rate, and reinvestment is the change in revenue divided by the sales-to-capital ratio. Free cash flow to the firm is after-tax operating income less reinvestment.
In stable growth, reinvestment is set by growth and the return on new capital (g ÷ RONIC), so the terminal value stays consistent with the growth assumed. Check the return on invested capital each year against the cost of capital and the industry, and use the projection check to compare the drivers with the industry.
Related: Projection check · Terminal value · WACC · Equity bridge · Model notes
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