FREE CASH FLOW AND IT’S USAGE IN CORPORATE VALUATION OF SUGAR SECTOR OF PAKISTAN

Abstract

Purpose In the light of agency theory, the concept of Free Cash Flow was introduced by (Jensen, 1986) since then it is been studied in different context. Free Cash Flow is basically the cash left on hands for investors after company make enough investment in both fixed asset and working capital to ensure its operation. Whereas, term Corporate Valuation is referred to the process of determining economic value for a business. Literature suggest that FCF is the one of the methods which can help in evaluating intrinsic value ofa firm. Thus, the objective ofthis paper is to explain and highlights the usage of Free Cash Flow in the Corporate Valuation ofsugar sector of Pakistan. And to examine the impact of FCF on Market Value of Stock of Sugar Sector of Pakistan. Methodology & Design A case study under a descriptive research is carried forward to explain the usage of Free Cash Flow in the Corporate Valuation of Sugar Sector of Pakistan. Through this study, the intrinsic value of JDW Sugar Mills Limited has been calculated. Moreover, other 5 companies listed within the same sector were given regards to investigate the relationship’s significance between Free Cash Flow and Market Value of Stock of Sugar Sector of Pakistan. This paper is based on Quantitative approach to extract the data from Pakistan Stock Exchange website and from financial statements of the companies between the year 2012-2019 for corporate valuation and between year 2015-2019 for testing hypothesis. E-views software is also used to determine the outcome of the study. It is an applied research which will provide insight to investor and will benefit in both academically and professionally. Findings dy indicates that the intrinsic value ofJDW Sugar Mills Limited on 30- The finding of the stu Sep-2019 is Rs 227.24 whereas, it’s Market Value on 30-Sep-2019 stands on Rs 319.00 which shows that firm is fairly priced. Additional to it, the value of F-statistics is equal to 0.361557 And P value is equal to 0.552480 which argue that the impact of Free Cash Flow on Market Value of Stock of Sugar Sector of Pakistan cannot be investigated in isolation as it will result in model insignificant. However, based on prior studies Market Value of Equity can be computed from Free Cash Flow. Limitations The absolute reliability of this study depends on the secondary data. Due to time constraints value of stock price was taken from market where as FCF was computed for testing hypothesis. Model insignificant is another limitation of this study