Table 75 calculation of the value of the entire

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Unformatted text preview: hich are far more difficult to estimate, given that they are paid at the discretion of the firm’s board. The more general nature of the free cash flow model is responsible for its growing popularity, particularly with CFOs and other financial managers. TABLE 7.5 Calculation of the Value of the Entire Company for Dewhurst Inc. FCFt (1) Year (t ) 2004 Present value of FCFt [(1) (2)] (3) 400,000 0.917 $ 366,800 2005 450,000 0.842 378,900 2006 520,000 0.772 401,440 2007 2008 $ PVIF 9%, t (2) 560,000 10,900,000a 0.708 396,480 0.650 7,085,000 Value of entire company, VC $8,628,620 aThis amount is the sum of the FCF 2008 of $600,000 from Table 7.4 and the $10,300,000 value of the FCF2009 ∞ calculated in Step 1. CHAPTER 7 Stock Valuation 333 Other Approaches to Common Stock Valuation Many other approaches to common stock valuation exist. The more popular approaches include book value, liquidation value, and some type of price/earnings multiple. Book Value book value per share The amount per share of common stock that would be received if all of the firm’s assets were sold for their exact book (accounting) value and the proceeds remaining after paying all liabilities (including preferred stock) were divided among the common stockholders. EXAMPLE Book value per share is simply the amount per share of common stock that would be received if all of the firm’s assets were sold for their exact book (accounting) value and the proceeds remaining after paying all liabilities (including preferred stock) were divided among the common stockholders. This method lacks sophistication and can be criticized on the basis of its reliance on historical balance sheet data. It ignores the firm’s expected earnings potential and generally lacks any true relationship to the firm’s value in the marketplace. Let us look at an example. At year-end 2003, Lamar Company’s balance sheet shows total assets of $6 million, total liabilities (including preferred stock) of $4.5 million, and 100,000 shares of common stock outstanding. Its book value per share therefore would be $6,000,000 $4,500,000 100,000 shares $15 per share Because this value assumes that assets could be sold for their book value, it may not represent the minimum price at which shares are valued in the marketplace. As a matter of fact, although most stocks sell above book value, it is not unusual to find stocks selling below book value when investors believe either that assets are overvalued or that the firm’s liabilities are understated. liquidation value per share The actual amount per share of common stock that would be received if all of the firm’s assets were sold for their market value, liabilities (including preferred stock) were paid, and any remaining money were divided among the common stockholders. EXAMPLE Liquidation Value Liquidation value per share is the actual amount per share of common stock that would be received if all of the firm’s assets were sold for their market value, liabilities (including preferred stock) were paid, and...
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This document was uploaded on 01/19/2014.

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