Answers and Solutions:
15  2
c.
The value of operations is the present value of all the future free cash flows that are
expected from current assetsinplace and the expected growth of assetsinplace
when discounted at the weighted average cost of capital:
(
)
.
WACC
1
FCF
V
1
t
t
t
0)
time
op(at
∑
∞
=
+
=
The terminal, or horizon value, is the value of operations at the end of the explicit
forecast period.
It is equal to the present value of all free cash flows beyond the
forecast period, discounted back to the end of the forecast period at the weighted
average cost of capital:
.
g
WACC
)
g
1
(
FCF
g
WACC
FCF
V
N
1
N
N)
time
op(at
−
+
=
−
=
+
The corporate valuation model defines the total value of a company as the value of
operations plus the value of nonoperating assets plus the value of growth options.
d. Valuebased management is the systematic application of the corporate value model
to a company’s decisions. The four value drivers are the growth rate in sales (g),
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 Spring '08
 Staff
 Cost Of Capital, Weighted average cost of capital, weighted average cost, INVESTed CAPITAL

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