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[12] FCFt\\Ku = FCFt  (Et1 + Dt1) [WACCt  Kut]
Expression [12] is obtained by making [11] equal to [1]. 4  IESE Business SchoolUniversity of Navarra Likewise, we can talk of a sixth method (using the business riskadjusted equity cash flow),
although this is not actually a new method, but is derived from the previous methods: Method 6. Using the business riskadjusted equity cash flow and Ku (required return on assets).
Equation [13] indicates that the value of the equity (E) is the present value of the expected
business riskadjusted equity cash flows (ECF\\Ku) discounted at the required return on assets
(Ku):
[13] E0 = PV0 [Kut; ECFt \\Ku]
The definition of the business riskadjusted equity cash flows (ECF\\Ku) is [14]:
[14] ECFt\\Ku = ECFt  Et1 [Ket  Kut]
Expression [14] is obtained by making [13] equal to [3]. Method 7. Using the economic profit and Ke (required return on equity).
Equation [15] indicates that the value of the equity (E) is the equity’s book value plus the
present value of the expected economic profit (EP) discounted at the required return on equity
(Ke).
[15] E0 = Ebv0 + PV0 [Ket; EPt]
The term economic profit (EP) is used to define the accounting net income or profit after tax
(PAT) less the equity’s book value (Ebvt1) multiplied by the required return on equity.
[16] EPt = PATt  Ke Ebvt1 Method 8. Using the EVA (economic value added) and the WACC (weighted average cost of
capital).
Equation [17] indicates that the value of the debt (D) plus that of the shareholders’ equity (E) is
the book value of the shareholders’ equity and the debt (Ebv0+ N0) plus the present value of the
expected EVA, discounted at the weighted average cost of capital (WACC):
[17] E0 + D0 = (Ebv0+ N0) + PV0 [WACCt ; EVAt]
The EVA (economic value added) is the NOPAT (net operating profit after tax) less the
company’s book value (Dt1 + Ebvt1) multiplied by the weighted average cost of capital (WACC).
The NOPAT is the profit of the unlevered company (debtfree).
[18] EVAt = NOPATt  (Dt1 + Ebvt1)WACC t Method 9. Using the riskfreeadjusted free cash flows discounted at the riskfree rate
Equation [19] indicates that the value of the debt (D) plus that of the shareholders’ equity (E) is
the present value of the expected riskfreeadjusted free cash flows (FCF\\ RF) that will be
generated by the company, discounted at the riskfree rate (RF):
[19] E0 + D0 = PV0 [RF t ; FCFt\\RF]
The definition of the riskfreeadjusted free cas...
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This note was uploaded on 05/10/2013 for the course MBA MBA taught by Professor Mba during the Fall '11 term at ESLSCA.
 Fall '11
 MBA
 Business

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