Free Cash Flow Methods

The free cash flow methods, Shareholder Value and Dividend Discount, measure the value of a business based on its ability to generate returns on investments in excess of its weighted average cost of capital.

Excess funds can be reinvested by the business or paid to the shareholders as dividends. In the first case, the business might invest in such areas as plant & equipment, additional working capital, or acquisitions, expecting to receive returns in excess of the cost of capital for the selected strategy.

Alternatively, the shareholders can reinvest their dividends in a capital market to earn risk-adjusted rates of return.