F A P V: Five Equivalent Methods

FIRM AND PROJECT VALUATION
Inputs
Valuation Object
Date 0 Proj Investment or Firm Cap
Tax Rate
Unlevered Cost of Equity Capital
Riskfree Rate=Cost of Riskfree Debt
Inf Horiz Growth Rate of Unlev Equity
Include Infinite Horizon?
No. 12
Finance 305, FALL 2012
HW 16
Page 3
Five Equivalent Methods
Valuation Object
Firm
Project
$360.00
40.0%
10.0%
3.0%
5.0%
Infinite Horiz
Yes
No
Cash Flows
Date
Revenues
Expenses
Gross Earnings
Depreciation
Earnings Bef Interest & Tax (EBIT)
Interest Expense
Earnings Before Tax
Taxes
Earnings
Add Back Depreciation
Cash Flow from Operations
1
$550.00
$410.00
$140.00
$60.00
$80.00
$0.00
$80.00
$32.00
$48.00
$60.00
$108.00
First Stage: Finite Horizon

2
3
4
$590.00
$620.00
$655.00
$435.00
$445.00
$470.00
$155.00
$175.00
$185.00
$60.00
$60.00
$60.00
$95.00
$115.00
$125.00
$0.00
$0.00
$0.00
$95.00
$115.00
$125.00
$38.00
$46.00
$50.00
$57.00
$69.00
$75.00
$60.00
$60.00
$60.00
$117.00
$129.00
$135.00
5
$675.00
$470.00
$205.00
$60.00
$145.00
$0.00
$145.00
$58.00
$87.00
$60.00
$147.00
2nd Stage:
Infin Horiz
6
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
New Invest in Plant and Equipment

After-Tax Salvage Value
New Invest in Working Capital
Cash Flows from Investments
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$300.00
$0.00
$300.00
New Borrowing (Repayment)
$0.00
$0.00
$0.00
$0.00
$0.00
$108.00
$108.00
$117.00
$117.00
$129.00
$129.00
$135.00
$135.00
$447.00
$447.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
Free Cash Flow to Equity (FCFE)

= Dividends
Interest
Less New Borrowing (Repayment)
$0.00
$0.00
$0.00
Cash Flow to Debtholders (CFD)
No. 12
HW 16
$0.00
Page 3
$0.00
$0.00
$0.00
$0.00
$0.00
Tax Shield Benefit

Free Cash Flow to the Firm (FCFF)
$0.00
$108.00
$0.00
$117.00
$0.00
$129.00
$0.00
$135.00
$0.00
$447.00
$0.00
$0.00
Alternative Way to get FCFF

Earnings
After-tax Interest Expense
Net Oper. Profit After Tax (NOPAT)
Depreciation
Cash Flows from Investments
$48.00
$0.00
$48.00
$60.00
$0.00
$108.00
$57.00
$0.00
$57.00
$60.00
$0.00
$117.00
$69.00
$0.00
$69.00
$60.00
$0.00
$129.00
$75.00
$0.00
$75.00
$60.00
$0.00
$135.00
$87.00
$0.00
$87.00
$60.00
$300.00
$447.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$300.00
$0.00
$240.00
$0.00
$180.00
$0.00
$120.00
$0.00
$60.00
$48.00
$36.00
$12.00
$57.00
$34.00
$23.00
$69.00
$32.00
$37.00
$75.00
$30.00
$45.00
$87.00
$28.00
$59.00
Debt (D)
Book Value of Equity
Economic Profit
Net Oper. Profit After Tax (NOPAT)
Capital Charge
Economic Profit
$0.00
$360.00
$0.00
$0.00
$0.00
No. 12
HW 16
Page 3
(1.) Adjusted Present Value (APV)
Date
Value of the Unlevered Firm
Tax Shield Benefit
Value of the Tax Shield Benefit
Value of Fut Cash Flows (APV Met)
- Date 0 Project Investment
NPV of Project (APV Method)
0
$509.92
$0.00
$509.92
$360.00
$149.92
1
$68.00
$492.90
$0.00
$0.00

2
3
4
$77.00
$89.00
$95.00
$465.21
$422.73
$370.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
5
$407.00
$0.00
$0.00
$0.00
(2) Free Cash Flow to Equity (FCFE)

Date
Inf Horiz Growth Rate of Lev Equity

2
3
4
2nd Stage:
Infin Horiz
6
$0.00
$0.00
2nd Stage:
Infin Horiz
6
0.0%
Debt + Equity (D+E)

Equity (E)
Levered Cost of Equity Capital
Free Cash Flow to Equity (FCFE)
Value of Equity (E)
Value of Debt (D)
Value of Fut Cash Flows (FCFE Met)
NPV of Project (FCFE Method)
$509.92
$509.92
$509.92
$0.00
$509.92
$360.00
$149.92
$492.90
$492.90
10.0%
$465.21
$465.21
10.0%
$422.73
$422.73
10.0%
$370.00
$370.00
10.0%
$68.00
$492.92
$0.00
$0.00
$77.00
$465.21
$0.00
$0.00
$89.00
$422.73
$0.00
$0.00
$95.00
$370.00
$0.00
$0.00
$0.00
$0.00
10.0%
$407.00
$0.00
$0.00
$0.00
(3) Free Cash Flow to the Firm (FCFF)

Date
Inf Horiz Growth Rate of the Firm

2
3
4
No. 12
HW 16
Page 3
0.0%
$0.00
$0.00
2nd Stage:
Infin Horiz
6
5.0%
Equity Weight (E / (D+E))

Debt Weight (D / (D+E))
Cost of Firm Capital (WACC)
Value of Fut Cash Flows (FCFF Met)
NPV of Project (FCFF Method)
100.0%
0.0%
$509.92
$360.00
$149.92
100.0%
0.0%
10.00%
100.0%
0.0%
10.00%
100.0%
0.0%
10.00%
$89.00
$422.73
100.0%
0.0%
10.00%
$68.00
$492.92
$77.00
$465.21
$95.00
$370.00
1
$68.00
$492.92
$0.00
$0.00

2
3
4
$117.00
$129.00
$135.00
$465.21
$422.73
$370.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
0.0%
0.0%
10.00%
$407.00
$0.00
(4) Dividend Discount Model (DDM)

Year
Dividend
Value of Equity (E)
Value of Debt (D)
Value of Fut Cash Flows (DDM Met)
NPV of Project (DDM Method)
0
$509.92
$0.00
$509.92
$360.00
$149.92
5
$447.00
$0.00
$0.00
$0.00
No. 12
HW 16
Page 3
5.0%
$0.00
2nd Stage:
Infin Horiz
6
$0.00
$0.00
No. 12
HW 16
Page 3
(5) Residual Income (RI) - Incomplete*

Year
Economic Profit
Economic Profit on Salvage Value
Value of the Economic Profit
+ Date 0 Book Value of the Firm
Value of Fut Cash Flows (RI Met)
NPV of Project (RI Method)
$149.92
$360.00
$509.92
$360.00
$149.92
1
$12.00
$152.92

2
3
4
$23.00
$37.00
$45.00
$145.21
$122.73
$90.00
* I am looking for the change(s) required so that Residual Income valuation matches the valuation from the
other four methods: (1) when there is positive debt, (2) when there are positive infinite horizon cash flows,
and (3) when the infinite horizon growth rate is positive. Please email one or more of the required changes
to cholden@indiana.edu and be acknowledged in the 4th Edition!
5
$59.00
$40.00
$0.00
2nd Stage:
Infin Horiz
6
$0.00

F A P V: Five Equivalent Methods

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FIRM AND PROJECT VALUATION

Five Equivalent Methods

First Stage: Finite Horizon

New Invest in Plant and Equipment

New Borrowing (Repayment)

Free Cash Flow to Equity (FCFE)

Cash Flow to Debtholders (CFD)

Tax Shield Benefit

Alternative Way to get FCFF

First Stage: Finite Horizon

(2) Free Cash Flow to Equity (FCFE)

First Stage: Finite Horizon

Debt + Equity (D+E)

(3) Free Cash Flow to the Firm (FCFF)

First Stage: Finite Horizon

Equity Weight (E / (D+E))

First Stage: Finite Horizon

(4) Dividend Discount Model (DDM)

(5) Residual Income (RI) - Incomplete*

First Stage: Finite Horizon

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