Corporate

Finance Professional Certificate MOOC

Course 2, The Free Cash Flow Method for Firm Valuation
Module 4, Relative Valuation

Non-Terminal Free Cash Flows Terminal Cash Flows

The estimated free cash-flows of a firm of the Cash-flows beyond the explicit forecasting
next X-number of years. period.
Residual Value Perpetuity Formula
$
The present value of the terminal-cash flows. !" =
%
PV = Present Value
C = Cash Flow
r = rate
Present Value (PV) Formula Growing Perpetuity Formula
&" $
!" = !" =
(1 + %)+ %−.
FV = Future Value PV = Present Value
PV = Present Value C = Cash Flow
r = rate r = rate
t = time g = growth rate of cash flows
Terminal Growth Rate Valuation with Multiples
The growth rate that a term settles into in the The use of multiples for valuation relies on
future and then maintains over time - forever. comparison with a similar asset for which we
already know the value.

Multiples Trailing Multiple
A multiple constructed using prior income data.
A multiple tells you the price-per-unit of some
important feature of the asset you want to value. Forward Multiple
A multiple constructed using estimates of future
We construct multiples by dividing the enterprise income.
value by some income measure such as sales or
EBIT. You should always measure the enterprise
value as of the date at which the multiple is
constructed.
Above the Line Multiple Below the Line Multiple
The multiples formed by dividing the enterprise Multiples which relate to equity holders – not
value by an income measure. The income the firm as a whole. One common “below
measure used for these types of multiples is an the line” multiple is the price to earnings
income measure before interest is taken out. ratio.