Debt Capacity Bargain using Cashflows

Debt Capacity Bargain using cashflows. Calculated as follows: a. Calculate the avg. operating cashflow using last 5 yrs data (only debt-free firms) b. Assume Interest coverage ratio = 4 c. Divide Avg. Op. Cash flow/Interest coverage d. Divide c. figure by interest rate (Interest rate assumed 12%). e. This will give us the Debt capacity of the business. f. Min. value of business (Value of equity) is 1.75 times Debt capacity (Graham, Security Analysis, Prof. Bakshi BFBV Lecture 10) g. Intrinsic value = Min. value of business + cash available h. Calculate if Intrinsic value > Mkt cap.

by Dkirand

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Market capitalization > 500 AND
Price to earning < 15 AND
Return on capital employed > 22%