Unformatted text preview: h flows (FCF\\RF) is :
 FCFt\\RF = FCFt - (Et-1 + Dt-1) [WACCt - RF t]
IESE Business School-University of Navarra - 5 Expression  is obtained by making  equal to .
Likewise, we can talk of a tenth method (using the risk-free-adjusted equity cash flow),
although this is not actually a new method but is derived from the previous methods: Method 10. Using the risk-free-adjusted equity cash flows discounted at the risk-free rate
Equation  indicates that the value of the equity (E) is the present value of the expected riskfree-adjusted equity cash flows (ECF\\RF) discounted at the risk-free rate (RF):
 E0 = PV0 [RF t; ECFt \\RF]
The definition of the risk-free-adjusted equity cash flows (ECF\\RF) is :
 ECFt\\RF = ECFt - Et-1 [Ket - RF t]
Expression  is obtained by making  equal to .
We could also talk of an eleventh method; using the business risk-adjusted capital cash flow
and Ku (required return on assets), but the business risk-adjusted capital cash flow is identical
to the business risk-adjusted free cash flow (CCF\\Ku = FCF\\Ku). Therefore, this method would
be identical to Method 5.
We could also talk of a twelfth method; using the risk-free-adjusted capital cash flow and RF
(risk-free rate), but the risk-free-adjusted capital cash flow is identical to the risk-free-adjusted
free cash flow (CCF\\RF = FCF\\RF). Therefore, this method would be identical to Method 9. 2. An Example. Valuation of the Company Toro Inc.
The company Toro Inc. has the balance sheet and income statement forecasts for the next few
years shown in Table 1. After year 3, the balance sheet and the income statement are expected
to grow at an annual rate of 2%. Table 1
Balance Sheet and Income Statement Forecasts for Toro Inc.
0 1 2 3 4 5 400
2,528 WCR (working capital requirements)
Gross fixed assets
- accumulated depreciation
Net fixed assets
TOTAL ASSETS 1,600
2,030 Debt (N)
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