Lecture Notes on Valuation and Financial Metrics

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Firm Value

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The sum of the present values of future free cash flows plus the present value of the terminal value.

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FCFt

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Free Cash Flow in year t

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Flashcards for firm valuation, economic value added, market value added, enterprise value, comparables valuation, cost of capital, free cash flow to equity and return metrics.

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21 Terms

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Firm Value

The sum of the present values of future free cash flows plus the present value of the terminal value.

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FCFt

Free Cash Flow in year t

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r

Discount rate (typically WACC)

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g

Growth rate

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Terminal Value

Value of firm after year N

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Economic Value Added (EVA)

NOPAT - (WACC * Capital)

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NOPAT

EBIT * (1 – tax rate)

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Capital

Total capital employed (debt + equity)

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EVA (Alternate Form)

Capital * (ROIC - WACC)

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Market Value Added (MVA)

Market Value of Capital - Book Value of Capital

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Enterprise Value (EV)

Equity Value + Net Debt

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Enterprise Value (EV) Calculation

Share Price * Shares Outstanding + Debt - Cash

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EV/EBITDA

Used for capital-intensive firms

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P/E

Equity-focused measure (price per share / earnings per share)

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P/S

Used when earnings are negative or volatile

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EV/Sales

Useful for startups or firms with no profit yet

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Cost of Preferred Stock

Dividend / Price

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Free Cash Flow to Equity (FCFE)

Net Income + Depreciation - Capex - ΔWC - Debt Repayment + New Debt Issued

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ROIC

NOPAT / Capital Invested

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ROE

Net Income / Equity

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ROA

Net Income / Total Assets