Equity value is the same. Equity versus Firm Valuation Method 1: Discount CF to Equity at Cost of Equity to get value of equity Cost of equity=13.625% · value of equity=50/1.13625+60/1.136252+68/1.136253+ 762/1.136254+(83,49+1603)/1136255=$1073 Method 2: Discount CF to Firm at Cost of Capital to get value offirm Cost of Debt= Pre-tax rate(l-tax rate)=10%(1-5)=5% WACC 13625%(1073/1873)+5%(800/1873)=994% PV of firm=90/10994+100/109942+108/109943+1162/1.09944+ (12349+2363)/109945=$1873 value of equity= Value of Firm- Market Value of Debt =$1873-$800=$1073
Equity Value is the same…
Valuation in steps Discounted Cash Flow Valuation: The Steps Estimate the discount rate or rates to use in the valuation Discount rate can be either a cost of equity (if doing equity valuation) or a cost of capital (if valuing the firm) Discount rate can be in nominal terms or real terms, depending upon whether the cash fows are nominal or real Discount rate can vary across time Estimate the current earnings and cash flows on the asset, to either equity investors(Cf to Equity)or to all claimholders(Cf to Firm Estimate the future earnings and cash flows on the firm being valued, generally by estimating an expected growth rate in earnings Estimate when the firm will reach"stable growth?"and what characteristics(risk cash flow) it will have when it does Choose the right DCF model for this asset and value it
Valuation in steps
The simplified model Generic Dcf Valuation model DISCOUNTED CASHFLOW VALUATION Expected Growt Cash flows Im Growth in Firm: Pre-debt cash Equity. Growth in Equity After debt Net IncomeEPS Firm is in stable growtr cash flows Grows at constant rate forever CF3 CF5 Fim: Value of Firm Equity Value of Equity Length of Period of High Growt Fm cost of Capital Equity Cost of Equity
The simplified model
Equity valuation model EQUITY VALUATION WITH DIVIDENDS 監 tention Rato stun on Equity stable grow Grows at constant rate Terminal Value= Dividend n+14Ke-gn Value of Equity Dividend1 Dividend 2 Dividend 3 Diidend4 Dividends Diidendn Forever Dsooun at Cost of Equity Cost of Equity No reinvestment risk Beta In same curency and+-Measures market risk x -Premium for average same terms(real or nsk investmen nominal as cash fows Base Equity rer幽ge Premium
Equity valuation model
equity valuation using FCF's EQUITY VALUATION WITH FCFE Debt Ratio= DR Net Income tention Ratio (Cap Ex-Depr)(1-DR) Retum on Equity Change in WC (LDR) Firm is n stable growth Grows at constant rate FCFE1 Value of Equity FCFE2 FCFE3 FCFE4 FCFE5 FCFEn Forever Discount at Cost of Equity Cost of Equity Riskfree Rate No default risk No ren Measures market risk n for average same terms(real or nominal as cash flowS Base Equity ntry risk Busin ge Leverage
Equity valuation using FCF’s