No.

12
Finance 305, FALL 2012
HW 16
Page 8

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

1
$550.00
$410.00
$140.00
$60.00
$80.00
$0.00
$80.00
$32.00
$48.00
$60.00
$108.00

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
$0.00
$0.00
$0.00
$95.00
$115.00
$125.00
$38.00
$46.00
$50.00
$57.00
$69.00
$75.00
$60.00
$60.00
$60.00
$117.00
$129.00
$135.00

5
$675.00
$470.00
$205.00
$60.00
$145.00
$0.00
$145.00
$58.00
$87.00
$60.00
$147.00

New Invest in Plant and Equipment

After-Tax Salvage Value
New Invest in Working Capital
Cash Flows from Investments

$0.00

$0.00

$0.00

$0.00

$0.00
$0.00

$0.00
$0.00

$0.00
$0.00

$0.00
$0.00

$0.00
$0.00
$0.00
$0.00

New Borrowing (Repayment)

$0.00

$0.00

$0.00

$0.00

$0.00

$108.00

$117.00

$129.00

$135.00

$147.00

Free Cash Flow to Equity (FCFE)

2nd Stage:
Infin Horiz
6
$740.00
$475.00
$265.00
$85.00
$180.00
$0.00
$180.00
$72.00
$108.00
$85.00
$193.00
$0.00
$0.00
$0.00

$193.00

No. 12
Finance 305, FALL 2012
HW 16
Page 8
= Dividends

$108.00

$117.00

$129.00

$135.00

$147.00

$193.00

$0.00
$0.00
$0.00

$0.00
$0.00
$0.00

$0.00
$0.00
$0.00

$0.00
$0.00
$0.00

$0.00
$0.00
$0.00

$0.00
$0.00
$0.00

Tax Shield Benefit

Free Cash Flow to the Firm (FCFF)

$0.00
$108.00

$0.00
$117.00

$0.00
$129.00

$0.00
$135.00

$0.00
$147.00

$0.00
$193.00

Alternative Way to get FCFF

Earnings
After-tax Interest Expense
Net Oper. Profit After Tax (NOPAT)
Depreciation
Cash Flows from Investments
Free Cash Flow to the Firm (FCFF)

$48.00
$0.00
$48.00
$60.00
$0.00
$108.00

$57.00
$0.00
$57.00
$60.00
$0.00
$117.00

$69.00
$0.00
$69.00
$60.00
$0.00
$129.00

$75.00
$0.00
$75.00
$60.00
$0.00
$135.00

$87.00
$0.00
$87.00
$60.00
$0.00
$147.00

$108.00
$0.00
$108.00
$85.00
$0.00
$193.00

$0.00
$300.00

$0.00
$240.00

$0.00
$180.00

$0.00
$120.00

$0.00
$60.00

$48.00
$36.00
$12.00

$57.00
$30.00
$27.00

$69.00
$24.00
$45.00

$75.00
$18.00
$57.00

$87.00
$12.00
$75.00

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

Debt (D)
Book Value of Equity

$0.00
$360.00

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

(1.) Adjusted Present Value (APV)

Date
Free Cash Flow to the Firm (FCFF)
Value of the Unlevered Firm
Tax Shield Benefit
Value of the Tax Shield Benefit
Value of Fut Cash Flows (APV Met)
- Date 0 Project Investment
NPV of Project (APV Method)

0
$661.55
$0.00
$661.55
$360.00
$301.55

1
$108.00
$619.71
$0.00
$0.00

First Stage: Finite Horizon

2
3
4
$117.00
$129.00
$135.00
$564.68
$492.15
$406.36
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00

5
$147.00
$0.00
$0.00
$0.00

$108.00
$6.00
$102.00

2nd Stage:
Infin Horiz
6
$0.00
$0.00

No. 12
Finance 305, FALL 2012
HW 16
Page 8
(2) Free Cash Flow to Equity (FCFE)
Date
Inf Horiz Growth Rate of Lev Equity
Debt + Equity (D+E)
Equity (E)
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 Fut Cash Flows (FCFE Met)
- Date 0 Project Investment
NPV of Project (FCFE Method)

$661.55
$661.55

$661.55
$0.00
$661.55
$360.00
$301.55

First Stage: Finite Horizon

2
3
4

$619.71
$619.71
10.0%

$564.68
$564.68
10.0%

$492.15
$492.15
10.0%

$406.36
$406.36
10.0%

$108.00
$619.71
$0.00
$0.00

$117.00
$564.68
$0.00
$0.00

$129.00
$492.15
$0.00
$0.00

$135.00
$406.36
$0.00
$0.00

2nd Stage:
Infin Horiz
6
5.0%

5
$0.00
$0.00
10.0%
$147.00
$0.00
$0.00
$0.00

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

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 Fut Cash Flows (FCFF Met)
- Date 0 Project Investment
NPV of Project (FCFF Method)

0
100.0%
0.0%

$661.55
$360.00
$301.55

First Stage: Finite Horizon

2
3
4

100.0%
0.0%
10.00%

100.0%
0.0%
10.00%

0.0%
0.0%
10.00%

100.0%
0.0%
10.00%
$129.00
$244.21

100.0%
0.0%
10.00%

$108.00
$414.81

$117.00
$339.29

$135.00
$133.64

1
$108.00
$414.81
$0.00
$0.00

First Stage: Finite Horizon

2
3
4
$117.00
$129.00
$135.00
$339.29
$244.21
$133.64
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00

$147.00
$0.00

(4) Dividend Discount Model (DDM)

Year
Dividend
Value of Equity (E)
Cash Flow to Debtholders (CFD)
Value of Debt (D)

0
$509.92
$0.00

5
$147.00
$0.00
$0.00
$0.00

0.0%
$0.00
$0.00

2nd Stage:
Infin Horiz
6
5.0%

5.0%
$0.00

2nd Stage:
Infin Horiz
6
$193.00
$0.00

No. 12
Finance 305, FALL 2012
HW 16
Page 8

Value of Fut Cash Flows (DDM Met)

- Date 0 Project Investment
NPV of Project (DDM Method)

$509.92
$360.00
$301.55

(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 Fut Cash Flows (RI Met)
- Date 0 Project Investment
NPV of Project (RI Method)

$301.55
$360.00
$661.55
$360.00
$301.55

1
$12.00
$319.71

First Stage: Finite Horizon

2
3
4
$27.00
$45.00
$57.00
$324.68

$312.15

$286.36

* 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
$75.00
$240.00
$2,040.00

2nd Stage:
Infin Horiz
6
$102.00