CORPORATE
VALUATION ESTIMATING CORPORATE VALUE 8-17
Year
Cash
Flow
Discount
Factor
PV of CF
1
11.6
1/(1.0813)
1
10.7278
2
12.4
1/(1.0813)
2
10.6055
3
13.2
1/(1.0813)
3
10.4408
4
14.2
1/(1.0813)
4
10.3873
Residual
261.0
1/(1.0813)
4
190.9319
PV =
233.0933
Less Market Value of Debt
168.80
Less Market Value of Preferred
12.30
Market Value of Common Equity
51.99
Shares Outstanding
8.00
Price per Share
6.50
Figure 8.5: Market Value of Common Equity Based on 7% Growth Rate
You can see that by changing the assumption of a 10% growth rate to a
7% rate, the market value of the company becomes 6.50 per share.
The analyst may continue to create different scenarios to get an idea
of the range of prices for the stock (or a range of values for a project).
The analyst may even try to estimate the probabilities of each scenario
occurring in order to find the most likely value. This information is
useful as part of the decision-making process concerning the investment
in a company or project.
Because the residual value is such a high proportion of the total value
of the discounted cash flows in the XYZ analysis, the analyst may
double check the assumptions concerning residual value to make sure
they are reasonable. As you can see, creating a spreadsheet to perform
this analysis saves a lot of time when recalculating the cash flows based
on different assumptions.