Could anyone point me in the direction of any papers or resources on creating a Equity Cash Flow model to value the S&P500? I'm curious if you would have to calculate FCFE for each company in the index or there is an easier way.

Question

anonymous · Answer

There is a short cut you can try:
FCFE = Dividends + Buybacks + Change in cash balance for the year
If you can get the aggregate numbers for the S&P 500, you are home free.

anonymous · Answer

Aswath, you kiddin me? Where do you account for the idiosynchracy and accounting shenanigans of each company?

anonymous · Answer

Aswath is looking directly at cash flow; the accounting "shenanigans" shouldn't come through via the cash flow, unless they are purposefully manipulating cash, a difficult task.But, I would reformulate Aswath's formula as follows:

FCFE = Dividends + Buybacks + Chg in Cash Balance - Equity Issuance

Otherwise, raising equity and receiving proceeds from exercising executive stock options would create the illusions of free cash flow.. Aswath you agree?