Академический Документы
Профессиональный Документы
Культура Документы
RT
Approaches to valuation
• Income oriented approach
• Income oriented approach is based on the principle of future
benefits, which states that the value of any business equals the net
present value of all future economic benefits attained as a result of
the ownership of the business.
• This difference between the asset value and going concern value is
commonly referred to as “goodwill”. Therefore asset based
approach or cost oriented approach measures only a part of firm’s
value.
• It does not assign any value for future growth.
Debtholders
Preferred stockholders
FCFF vs. FCFE Approaches to
Firm & Equity Valuation
Equity Value
FCFEt
Equity value
t 1 1 r
t
Single-Stage Free Cash Flow Models
FCFF1
Firm value
WACC g
Equity value Firm value Debt value
FCFE1
Equity value
rg
Example: Single-Stage FCFF Model
Current FCFF $6,000,000
Target debt to capital 0.25
Market value to debt $30,000,000
Shares outstanding 2,900,000
Required return on equity 12%
Cost of debt 7%
Long-term growth in FCFF 5%
Tax rate 30%
$6,000,000 (1.05)
Firm value = = $120.5 million
0.1023 −0.05
n
FCFEt FCFEn 1
1
Equity value +
t =1 1 r
t
r g (1 r )n
Example: Two-Stage FCF Models
Current FCFF in millions $100 .00
1 2 3 4 5 6
FCFFn 1 1
Terminal value
WACC g (1 WACC)n
$320.4 1
Terminal value $3979
0.10 0.05 (1 0.10) 5
Note : The above formula shows the present value of perpetual stream at t = 0
Example: Three-Stage FCF Models
n
FCFFt FCFFn 1
1
Firm value +
t =1 1 WACC t WACC g (1 WACC)n