1
III. DCF Methods
We take up five DCF methods to value the firm with
perpetual cash flow, a constant debt ratio, and risk-free
debt.
A.
NPV
B.
IRR
C.
APV
D.
FTE
E.
CCF

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2
Present value
1
2
t
t+1
t+2
+------+------+--/
&
/---+------+------+---/
&
d
1
d
2
d
t
d
t+1
d
t+2
In classic form the stock price is the present value
of all of its dividends
1
2
0
1
2
1
1
1
1
1
t
t
t
t
t
d
d
d
d
P
...
...
(
r)
(
r)
(
r)
(
r)
¥
=
=
+
+
+
+
=
°
+
+
+
+

3
Terminal value and interim vale
In valuing assets we won
’
t use infinite streams.
Instead, we separate value into two parts
Value
= present value of interim cash flows +
present value of time T
“
terminal value
”
(what it can be sold for at T)

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