Free Cash Flow And Its Applied Research In Business Valuation

Free cash flow(FCF) includes information of balance sheet, profit and loss statement and cash flow statement, it can reflect the value-creating ability of the company and be an important parameter of enterprise valuation. Based on the existed FCF models, the paper studies the concept, models and uses of FCF by the framework of theoretical study, application study and empirical study.In the theoretical study section, the paper presents the similarities and dissimilarities of the existed FCF models. From the viewpoint of different stakeholders of the company, it divides FCF into different hierarchies and analyzes the influence factors. On this basis work, the paper analyses the process of adjusting net accounting profit to operating cash flow and suggests the adjusted FCF model computing from operating cash flow.In the application study section, the paper discusses two methods of FCF applying in enterprise valuation, discounted FCF method and FCF multiple method, and explains their equivalence in stable companies. Furthermore, the paper compares the two methods and points out suitable conditions for each of them.In the empirical study section, the paper exams three hypothesizes by data of 172 stable companies listed in SSE A market before 1998. Firstly, it validates that the circulating stock price are higher than inside value per share(IVPS) and adjusted inside value per share(AIVPS) after excluding the influence of stocks out of circulation, which indicates that the stock value is highly estimated in the stock market of China. Secondly, the paper validates that the companies are highly estimated to different extents by correlation analysis, which indicates that the price fluctuates from both IVPS and AIVPS. Then the paper explains four possible causes of the fluctuation. Thirdly, the paper constructs investment portfolio based on low stock price/ IVPS ratio, and validates that the return of the portfolio is higher than return of SSE A market.In the conclusion section, the paper summarizes the study conclusion and points out deficiencies of the study and expectations of the henceforth study.