When I was thinking about the issue of double counting of free cash flow, one query that I had was as such:- I understand that me in the position of the small stockholder is at the mercy of the management in terms of how free cash flow is deployed. Hence it is logical that I should only discount cash flows that are literally received by me (e.g. dividends, potential selling price of the stock that I hold). However, if I put myself in the shoes of the business owner (i.e. the Buffett idea), then wouldn’t I truly receive the free cash flows? in the same way as Buffett receives the free cash flows from its subsidiaries which he then channels to his investments. In that case, shouldn’t I be able to discount the projected free cash flows?
The answer is as such: Thinking as a business owner does not make the cash flows more “free”. This is because if say increased capital spending is used to spur growth, then in both cases (i.e. as a small shareholder or as a business owner), those free cash flows are re-invested, and hence are not truly free, and cannot be discounted at that point in time. Even as a business owner, while you receive the cash flows initially, you need to plow it back again, so you cannot extract the full free cash flow value. The only distinction then between the small stockholder and the business owner is, as highlighted above, the ability to direct the use of the free cash flow. Note however that if the business owner truly discounts the full free cash flow, truly intends to extract the full free cash flow, then he must model in the corresponding effects on the future earnings due to lower or no re-investment.