CORPORATE
VALUATION ESTIMATING CORPORATE VALUE 8-7
More accurate
analysis with
inside
information
Analysts working inside a company have access to much more
complete information than those studying a competitor from outside
the firm. Analysts inside a company can conduct a more in-depth study
that actually projects the entire income statement and balance sheet.
From that, they can build an estimated cash flow statement, much as we
did in Unit One. For example, inside analysts have access to the exact
figures that the company is planning to spend on working capital and
fixed assets; therefore, they do not have to make estimates using
incremental increases in sales.
We suggest that you work through the cash flow calculations in Figure
8.1 to make sure that you are comfortable with all of the figures. You
may want to try and replicate the analysis on a spreadsheet program to
begin building a framework that you can use in the future.
To review, free cash flow is the amount of cash generated by a
company's operations for distribution to its debt and equity investors.
We can estimate these cash flows for several years in the future in
order to estimate the value of the company to its shareholders.
RESIDUAL VALUE
Value at the
end of the
forecast
period
In a perfect world, we would be able to project cash flows for the
expected life of the company. However, it is impractical, and often
inaccurate, to forecast cash flows far into the future. Most forecasts
project cash flows for the next five to ten years. However, most
companies or projects still have value at the end of the forecast period.
This value is often referred to as the residual value of the firm.