di-0451-e

5 expression 20 is obtained by making 19 equal to 1

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: h flows (FCF\\RF) is [20]: [20] FCFt\\RF = FCFt - (Et-1 + Dt-1) [WACCt - RF t] IESE Business School-University of Navarra - 5 Expression [20] is obtained by making [19] equal to [1]. 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 [21] 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): [21] E0 = PV0 [RF t; ECFt \\RF] The definition of the risk-free-adjusted equity cash flows (ECF\\RF) is [22]: [22] ECFt\\RF = ECFt - Et-1 [Ket - RF t] Expression [22] is obtained by making [21] equal to [3]. 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 1,600 515 2,300 450 1,850 2,365 550 2,600 720 1,880 2,430 561.00 2,913.00 995.40 1,917.60 2,478.60 572.22 3,232.26 1,276.31 1,955.95 2,528 WCR (working capital requirements) Gross fixed assets - accumulated depreciation Net fixed assets TOTAL ASSETS 1,600 2,000 430 1,800 200 1,600 2,030 Debt (N) Equity (...
View Full Document

Ask a homework question - tutors are online