 An approach alternative to dividend discount model for valuing a firm's stock price is to use the firm's pre cash flows instead. These are the cash flows that are available to the company itself and its equity holders. The usage of pre cash flows in stock valuation is also useful in a case where a company does not pay any dividend because for such company the application of dividend discount model is difficult to use. Also the usage of pre cash flows in stock valuation gives more better insights about the firm than the dividend discount model. The first approach in pre cash flow usage is the pre cash flow for the firm or FCFF. These are the after-tax cash flows raised by a firm's operations, net of the capital investments and the networking capital. These cash flows are available to the firm and its equity holder and its debt holders. Now using the constant growth dividend discount model the FCFF and the terminal value of the firm can be discounted in order to determine the firm value and their discounting can be at the company's vague or the weighted average cost of capital. So to determine the value of the firm using the pre cash flows to the firm we have two variables. The first is the yearly pre cash flows to the firm and the second variable is the firm's terminal years pre cash flows of the firm and both we are required to discount at the firm's vague. So the resulting value is the firm's pair market value and if we divide this value by the number of shares then it will give us the pre cash flow of the firm per share. The second approach in this regard is to use free cash flow to the equity instead to the firm. These free cash flows to the equity are adjusted by after tax interest expense cash flows on the issuance and repayment of the debt. Now to determine the value of equity we can deduct the value of debt from the present value of the free cash flow of the firm that we have determined in our earlier example. This means that when we have determined free cash flow of the firm and we discount it at the firms vague it gives us the value of the firm and if from this value of the firm we deduct we deduct the value of the debt it gives us the free cash value of the equity holders or the fair value of the fair market value of the equity holders. Now this value of the equity can also be determined alternatively using the firm's free cash flows to the equity and the firm's cost of equity. So for that purpose we need to have two types of cash flows. Number first is the free cash flow to the equity holders and the free cash flow to the equity holders at the terminal year of the company. So we need to divide the yearly free cash flows to the equity holders and the firm's terminal years free cash flow to the equity holders over the firm's cost of capital and the resulting value is the fair value of the equity. Now how free cash flow valuation model works for that purpose we have an example here we see that in panel A we have input data that is related to price earning capital spendings long-term debt number of shares earning per share and working capital and then in panel B we have cash flow calculations using profit interest rate change in working capital depreciation and capital spendings the resulting figure is the free cash flow of the firm and free cash flow of equity and these are the two cash flows that we need for our example. In panel C now we need to determine our discount rate which is the company's WEG for determining discount rate we use the KPA model and for that KPA model we have company's current beta it's unleavoured beta its terminal growth rate tax rate and rate of debt which is interest rate risk free rate market risk premium market value of equity debt value levered beta and the resulting value is the WEG for using that WEG we have present value factor each for FCFF and FCFE and finally we have the present values for the firms free cash flow for the firm and free cash flow for the equity now these are the variables that we are using our computation now we have the data from 2016 and 17 and data for 2020 these are highlighted in gray color for 2018 and 19 the data we have gathered through the interpolation from beginning and final values so these are the interpolated values now see an important thing that we have negative free cash flow to the equity holder in earlier years and in the final year it is a positive the negative cash flows are due to the debt repayments now come to our intrinsic values of the firm and intrinsic value of the equity and here is the intrinsic values of the firm and for the equity holders by dividing these values over the company's number of shares we have the internal values intrinsic values per share so how these valuation models can be compared we see that in principle the free cash flow approach is fully consistent with the dividend discount model because both of the models use K and G as the discounting factors but in practical the values from these cash flow models may differ substantially because the financial analysts are always forced to make certain simple assumptions this means that finding bargains under these evaluation models is not easy but the free cash flow approach is a straight forward model application then finding a proper inputs for other models the conclusion here is that it is extremely useful model being a free cash flow model for the financial analysts because they provide ballpark estimates of the intrinsic value of the company's stock there are certain problems with the discounted cash flow models like discounted cash flow valuation estimation may always going to be some imprecise because estimation of the yearly cash flows and the terminal value can be highly sensitive to small changes in some input values for example there is a chance that a less reliable component of value is the economic profit on the assets already in place by the firm also there is a least reliable component of value of growth opportunities computed for the particular firm