McSpirit also sees the non-productive capital spending rising from no change previously and free cash flow estimates for FY19 falling "materially' on higher spending and lower discretionary cash flows
. The analyst keeps his Market Perform rating on Diamondback Energy, stating that he wants to see how the synergy and productivity gains materialize in the combination.
Shareholder value is a function of the amount and timing of discretionary cash flows to the (common) shareholders of a company.
Shareholder value is created in investment opportunities, such as major capital expenditures, when the present value of prospective discretionary cash flows to shareholders expected from the project discounted at an appropriate rate of return on equity exceeds the initial cost of the investment.
As with investment opportunities, shareholder value is created in corporate acquisitions when the discretionary cash flows to shareholders exceed the required rate of return on equity.
The assessment of a particular operating segment or division should not only consider the amount of discretionary cash flows generated by that segment, but also the resources that are required to generate these cash flows, including capital assets and working capital.
Dividend payments provide shareholders with a direct source of value--immediate cash, instead of higher equity value on a per share basis through reinvestment of discretionary cash flows into the corporation.
Shareholder value creation stems from management's ability to generate discretionary cash flows to shareholders in excess of the required rate of return on equity.
A discount rate is the rate of return used in a discounted cash flow valuation methodology to convert a series of forecasted discretionary cash flows to present value.
First, discount rates should be applied to forecasted discretionary cash flows. It is discretionary cash flows, and not accounting earnings, that drives economic value.
For example, where prospective discretionary cash flows are expressed in nominal terms (including inflation), the discount rate should also be expressed in nominal terms, and vice versa.
Applied to projected discretionary cash flows determined before debt servicing costs (i.e.
However, the discount rate and capitalization rate to apply can be berter justified if it is based on a thorough analysis of economic conditions, industry risk factors, company-specific factors and the assumptions underlying the projected discretionary cash flows. Further, companies can avoid making technical errors in their corporate acquisition analysis by adhering to the underlying principles of discount rate determination and by understanding the basis by which corporate hurdle rates were developed.