Pair wise comparisons show that in comparisons between EBITDA / OCF, EBITDA / UFCF, EBIT / UFCF, and PROFIT / FCFE we can reject the null hypothesis of equality between means with a two-sided test with significance at 1.
In fact, research shows that firms, even if characterized by positive profit, may not be able to pay dividends, given that profit is statistically higher than FCFE.
Total FCFE in 2012-20E could reach RUB485bn, while a 25% dividend payout ratio would require only RUB417bn for both the ordinary and the preferred shares.
Transneft's ability to generate high FCFE could be exploited to support oil companies, in our view (for example, by reducing oil transportation tariffs).
The way those formulas work will be illustrated with an example, in which free cash flows will be calculated as FCFF and FCFE.
In FCFE calculation, we additionally distinguish flow and expenses related to debt: interests, taking a loan capital, payment of loan capital, following the formula (Marciniak, 2001):
When we replace the dividends with FCFE to value equity, we are doing more than substituting one cash flow for another.
2) The expected growth in FCFE will include growth in income from operating assets and not growth in income from increases in marketable securities.
A FCFE model is simply a dividend discount model where the dividend is replaced by FCFE per share:
The required rate of return (3) for an equity investment is r and the estimated growth in FCFE is g.
Table 1 Framework of multiples Value drivers Earnings Assets Dividends Cash flow Revenue P GP TA OD CgbO R EBITDA IC NCIfOA EBIT BE NCIfIA PAT FCFE
PBT FCFF HE P--Market price GP--Gross profit EBITDA--Earnings before interest, tax, depreciation and amortisation EBIT--Earnings before interest and tax PAT--Post-tax earnings PBT--Pre-tax earnings HE--Headline earnings TA--Total assets IC--Invested capital BVE--Book value of equity OD--Ordinary cash dividend CgbO--Cash generated by operations NCIfOA--Net cash inflow from operating activities NCIfIA--Net cash inflow from investment activities FCFE
--Free cash flow to equity FCFF--Free cash flow to the firm R--Revenue
is the free cash flows to equity holders divided by sales, Vega is calculated by Black-Scholes-Merton model, Ln (Size) is the logarithm of issue size, std (Beta) is standard deviation of beta.