What will my balance sheet income statement and cash

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Unformatted text preview: valuation software such as BallPark Business Valuation and VALUware. These programs offer buyers and sellers a quick way to estimate the business’s value and to answer such questions as: • How much cash will my business generate or consume? • What will my balance sheet, income statement, and cash flow statement look like in 5 years? • Should I seek debt or equity to finance growth? • What impact will capital purchases have on my venture? • How much ownership in my business should I give up for a $2 million equity contribution? Once the negotiators decide to move forward, however, they usually should hire an experienced valuation professional to develop a formal valuation. Sources: “About Ballpark Business Valuation,” Bullet Proof Business Plans, downloaded from www.bulletproofbizplans.com/ BallPark/About_/about_.html; Jill Andresky Fraser, “Business for Sale: Southeastern Seafood Distributor,” Inc. (October 1, 2000), downloaded from www.inc.com ; VALUware, www.bizbooksoftware.com/VALUWARE. HTM. Although dividend valuation models are widely used and accepted, in these situations it is preferable to use a more general free cash flow valuation model. The free cash flow valuation model is based on the same basic premise as dividend valuation models: The value of a share of common stock is the present value of all future cash flows it is expected to provide over an infinite time horizon. However, in the free cash flow valuation model, instead of valuing the firm’s expected dividends, we value the firm’s expected free cash flows, defined in Equation 3.3 (page 106). They represent the amount of cash flow available to investors—the providers of debt (creditors) and equity (owners)—after all other obligations have been met. The free cash flow valuation model estimates the value of the entire company by finding the present value of its expected free cash flows discounted at its weighted average cost of capital, which is its expected average future cost of funds over the long run (see Chapter 11), as specified in Equation 7.7. VC FCF1 (1 ka)1 FCF2 (1 ka)2 ... FCF∞ (1 ka)∞ where VC FCFt ka value of the entire company free cash flow expected at the end of year t the firm’s weighted average cost of capital (7.7) CHAPTER 7 331 Stock Valuation Note the similarity between Equations 7.7 and 7.2, the general stock valuation equation. Because the value of the entire company, VC, is the market value of the entire enterprise (that is, of all assets), to find common stock value, VS, we must subtract the market value of all of the firm’s debt, VD, and the market value of preferred stock, VP, from VC. VS VC VD VP (7.8) Because it is difficult to forecast a firm’s free cash flow, specific annual cash flows are typically forecast for only about 5 years, beyond which a constant growth rate is assumed. Here we assume that the first 5 years of free cash flows are explicitly forecast and that a constant rate of free cash flow growth occurs beyond the en...
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