**Part 2**of a

**4-part series**relative to the calculation of

**Equity Cash Flow**(

**ECF**) using

**R**. If you missed

**Part 1**, be certain read that first part before proceeding. The content builds off prior described information/data.

**Part 1**previous post is located here.

**‘ECF – Method 2’**is defined as follows:

**ECF – Method 2’**equals free cash Flow (

**FCFF**) minus after-tax Debt Cash Flow (

**CFd**).

Reference details of the

**5-year capital project’s fully integrated financial statements developed in R**at the following link. The R output is formatted in Excel. Zoom for detail.

https://www.dropbox.com/s/lx3uz2mnei3obbb/financial_statements.pdf?dl=0

The first order of business is to define the terms necessary to calculate

**FCFF.**

Next, pretax Debt Cash Flow (CFd) and its components are defined as follows:

The following data are added to the ‘

**data**’ tibble from the prior article relative to the financial statements.

data <- data %>% mutate(ie = c(0, 10694, 8158, 527, 627, 717 ), np = c(31415, 9188, 13875, 16500, 18863, 0), LTD = c(250000, 184952, 0, 0, 0, 0), cpltd = c(0, 20550, 0, 0, 0, 0), ni = c(0, 47584, 141355, 262035, 325894, 511852), bd = c(0, 62500, 62500, 62500, 62500, 62500), chg_DTL_net = c(0, 35000, 55000, 35000, -25000, -100000), cash = c(30500, 61250, 92500, 110000, 125750, 0), ar = c(0, 61250, 92500, 110000, 125750, 0), inv = c(30500, 61250, 92500, 110000, 125750, 0), pe = c(915, 1838, 2775, 3300, 3773, 0), ap = c(30500, 73500, 111000, 132000, 150900, 0), wp = c(0, 5513, 8325, 9900, 11318, 0), itp = c(0, -819.377, 9809, 34923, 60566, 0), CapX = c(500000,0,0,0,0,0), gain = c(0,0,0,0,0,162500), sp = c(0,0,0,0,0,350000))

**View tibble.**

All of the above calculations are defined in the below

**R**function

**ECF_2**.

**‘ECF – Method 2’ R function**

ECF_2 <- function(a) { ECF2 <- tibble(T_ = a$T_, ie = a$ie, ii = a$ii, Year = c(0:(length(ii)-1)), ni = a$ni, bd = a$bd, chg_DTL_net = a$chg_DTL_net, gain = - a$gain, sp = a$sp, ie_AT = ie*(1-a$T_), ii_AT = - ii*(1-a$T_), gcf = ni + bd + chg_DTL_net + gain + sp + ie_AT + ii_AT, OCA = a$cash + a$ar + a$inv + a$pe, OCL = a$ap + a$wp + a$itp, OWC = OCA - OCL, chg_OWC = OWC - lag(OWC, default=0), CapX = - a$CapX, FCFF1 = gcf + CapX - chg_OWC, N = a$LTD + a$cpltd + a$np, chg_N = N - lag(N, default=0), CFd_AT = ie*(1-T_) - chg_N, ECF2 = FCFF1 - CFd_AT ) ECF2 <- rotate(ECF2) return(ECF2) }

Run the R function and view the output.

R Output formatted in Excel

Run the R function and view the output.

R Output formatted in Excel

**Method 2**

‘

**ECF Method 2**‘ agrees with the prior results from ‘

**ECF Method 1**‘ each year. Any differences are due to rounding error.

This

**ECF**calculation example is taken from my newly published textbook, ‘

**Advanced Discounted Cash Flow (DCF) Valuation using R**.’ It is discussed in far greater detail along with development of the integrated financials using

**R**as well as numerous, advanced

**DCF**valuation modeling approaches – some never before published. The text importantly clearly explains ‘

**why’**these

**ECF**calculation methods are

**mathematically**

**exactly equivalent**, though the individual components appear vastly different.

Reference my website for further details.

**https://www.leewacc.com/**

**Next up, ‘ECF – Method 3’ …**

Brian K. Lee, MBA, PRM, CMA, CFA

Brian K. Lee, MBA, PRM, CMA, CFA