Professional Documents
Culture Documents
Introduction to Valuation
Fair value
Intrinsic Value
Fundamental Value
Common stock
Warrants
Leases
FCFt CVF,C
= t=1
C
VF, 0 t
+ C
(1.2)
(1+rUA ) (1+ rUA )
1
CVF,C = FCFC+1 × (1.3)
(rUA g)
FCFt CVF,C
= t=1
C
VF, 0 + (1.2)
t
(1+rUA ) (1+ rUA )C
FCFt FCFC+1 1
= t=1
C
VF, 0 + × (1.4)
(1+rUA ) t (rUA g) (1+ rUA )C
© Cambridge Business Publishers 2014 30 Corporate Valuation by Holthausen & Zmijewski
The Discounted Cash Flow (DCF)
Valuation Model
Assume the free cash flows of an investment, with
a 13% discount rate, are $100 in Year 1, $120 in
Year 2, $150 in Year 3, and will grow at 3% in
perpetuity after Year 3
The value of this investment, which we can
calculate two ways, is
$100 $120 $150 $150 1.03 1
VF, 0 $1,357.19
1 2
(1.13) (1.13) (1.13) 3
(.13 .03) (1.13) 3
CVFirm
$ in millions Year 0 Year 1 Year 2 Year 3 Year 3
Unlevered Free Cash Flow for Continuing Value (CV) $ 154.50
Discount Factor for Continuing Value 10.000
Unlevered Free Cash Flow and CV $ 100.00 $ 120.00 $ 150.00 $ 1,545.00
Discount Factor 0.885 0.783 0.693 0.693
Present Value $ 88.50 $ 93.98 $ 103.96 $ 1,070.76
Value of the Firm $ 1,357.19
$0
2007
2008
2009
2010
2011
-$100
Facebook Free Cash Flows in $ millions
$2,000
-$1,000
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
© Cambridge Business Publishers 2014 57 Corporate Valuation by Holthausen & Zmijewski
Facebook Inc.
$25,000
$5,000
$0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032