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?

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
New Invest in Plant and Equipment
After-Tax Salvage Value
New Invest in Working Capital
Cash Flows from Investments
New Borrowing (Repayment)
Free Cash Flow to Equity (FCFE)

1
$550.00
$410.00
$140.00
$60.00
$80.00
$7.50
$72.50
$29.00
$43.50
$60.00
$103.50

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
$7.65
$7.80
$7.95
$87.35
$107.20
$117.05
$34.94
$42.88
$46.82
$52.41
$64.32
$70.23
$60.00
$60.00
$60.00
$112.41
$124.32
$130.23

($30.00)

($30.00)

($30.00)

($30.00)

($10.00)
($40.00)

($10.00)
($40.00)

($10.00)
($40.00)

($10.00)
($40.00)

($30.00)
$0.00
($10.00)
($40.00)

$5.00

$5.00

$5.00

$5.00

$5.00

$68.50

$77.41

$89.32

$95.23

$107.14

5
$675.00
$470.00
$205.00
$60.00
$145.00
$8.10
$136.90
$54.76
$82.14
$60.00
$142.14

2nd Stage:
Infin Horiz
6
$740.00
$475.00
$265.00
$85.00
$180.00
$8.25
$171.75
$68.70
$103.05
$85.00
$188.05
($30.00)
($10.00)
($40.00)

$148.05

= Dividends

$68.50

$77.41

$89.32

$95.23

$107.14

Interest
Less New Borrowing (Repayment)
Cash Flow to Debtholders (CFD)

$7.50
($5.00)
$2.50

$7.65
($5.00)
$2.65

$7.80
($5.00)
$2.80

$7.95
($5.00)
$2.95

Tax Shield Benefit

Free Cash Flow to the Firm (FCFF)

$3.00
$68.00

$3.05
$77.01

$3.12
$89.00

$3.18
$95.00

$3.24
$107.00

$3.30
$153.00

Alternative Way to get FCFF

Earnings
After-tax Interest Expense
Net Oper. Profit After Tax (NOPAT)
Depreciation

$43.50
$4.50
$48.00
$60.00

$52.41
$4.59
$57.00
$60.00

$64.32
$4.68
$69.00
$60.00

$70.23
$4.77
$75.00
$60.00

$82.14
$4.86
$87.00
$60.00

$103.05
$4.95
$108.00
$85.00

$8.10
($5.00)
$3.10

$148.05

$8.25
$0.00
$8.25

Cash Flows from Investments

Free Cash Flow to the Firm (FCFF)
Debt (D)
Book Value of Equity

$250.00
$110.00

Economic Profit
Net Oper. Profit After Tax (NOPAT)
Capital Charge
Economic Profit

($40.00)
$68.00

($40.00)
$77.00

($40.00)
$89.00

($40.00)
$95.00

($40.00)
$107.00

$255.00
$85.00

$260.00
$60.00

$265.00
$35.00

$270.00
$10.00

$275.00
($15.00)

$48.00
$10.50
$37.50

$57.00
$8.13
$48.87

$69.00
$5.76
$63.24

$75.00
$3.36
$71.64

$87.00
$0.96
$86.04

(1.) Adjusted Present Value (APV)

Date

First Stage: Finite Horizon

3
4

($40.00)
$153.00

$108.00
($1.47)
$109.47

2nd Stage:
Infin Horiz
6

Free Cash Flow to the Firm (FCFF)

Value of the Unlevered Firm
Tax Shield Benefit
Value of the Tax Shield Benefit
Value of the Firm (APV Method)
- Date 0 Firm Capital
Value Added by Firm (APV Method)

$2,223.67
$109.15
$2,332.82
$360.00
$1,972.82

$68.00
$2,378.03
$3.00
$109.42

$77.00
$2,538.84
$3.05
$109.66

$89.00
$2,703.72
$3.12
$109.83

$95.00
$2,879.09
$3.18
$109.94

$107.00
$3,060.00
$3.24
$110.00

(2) Free Cash Flow to Equity (FCFE)

Date
Inf Horiz Growth Rate of Lev Equity
Debt + Equity (D+E)
Equity (E)

0
$2,332.82
$2,082.82

1
$2,487.46
$2,232.46

First Stage: Finite Horizon

2
3
4
$2,648.49
$2,388.49

$2,813.55
$2,548.55

$2,989.03
$2,719.03

5
$3,170.00
$2,895.00

$153.00
$3.30

2nd Stage:
Infin Horiz
6
5.2%

Levered Cost of Equity Capital

Free Cash Flow to Equity (FCFE)
Value of Equity (E)
Cash Flow to Debtholders (CFD)
Value of Debt (D)
Value of the Firm (FCFE Method)
- Date 0 Firm Capital
Value Added by Firm (FCFE Method)

10.5%

$2,082.82
$250.00
$2,332.82
$360.00
$1,972.82

$68.50
$2,232.47
$2.50
$255.00

10.5%
$77.41
$2,388.49
$2.65
$260.00

10.4%
$89.32
$2,548.55
$2.80
$265.00

10.4%
$95.23
$2,719.03
$2.95
$270.00

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

First Stage: Finite Horizon

10.4%
$107.14
$2,895.00
$3.10
$275.00

10.3%
$148.05
$8.25

2nd Stage:
Infin Horiz

Date
Inf Horiz Growth Rate of the Firm
Equity Weight (E / (D+E))
Debt Weight (D / (D+E))
Cost of Firm Capital (WACC)
Free Cash Flow to the Firm (FCFF)
Value of the Firm (FCFF Method)
- Date 0 Firm Capital
Value Added by Firm (FCFF Method)

6
5.0%

89.3%
10.7%

$2,332.82
$360.00
$1,972.82

89.7%
10.3%
9.54%

90.2%
9.8%
9.57%

90.6%
9.4%
9.59%
$89.00
$2,813.55

91.0%
9.0%
9.61%

$68.00
$2,487.47

$77.00
$2,648.49

$95.00
$2,989.03

1
$68.50
$2,232.47
$2.50
$255.00

First Stage: Finite Horizon

2
3
4
$77.41
$89.32
$95.23
$2,388.49
$2,548.55
$2,719.03
$2.65
$2.80
$2.95
$260.00
$265.00
$270.00

91.3%
8.7%
9.63%
$107.00
$3,170.00

(4) Dividend Discount Model (DDM)

Year
Dividend
Value of Equity (E)
Cash Flow to Debtholders (CFD)
Value of Debt (D)
Value of the Firm (DDM Method)
- Date 0 Firm Capital

0
$2,082.82
$250.00
$2,332.82
$360.00

5
$107.14
$2,895.00
$3.10
$275.00

9.8%
$153.00

2nd Stage:
Infin Horiz
6
$148.05
$8.25

Value Added by Firm (DDM Method)

$1,972.82

(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 the Firm (RI Method)
- Date 0 Firm Capital
Value Added by Firm (RI Method)

$941.37
$360.00
$1,301.37
$360.00
$941.37

1
$37.50
$993.71

First Stage: Finite Horizon

2
3
4
$48.87
$63.24
$71.64
$1,039.93

$1,076.45

$1,108.29

* 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
$86.04
$15.00
$1,114.03

2nd Stage:
Infin Horiz
6
$109.47

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