rate is 3 percent, the expected liquidation value can be
estimated:
The limitation of this approach is that it is based on
accountingbookvalueanddoesnotreflecttheearningpower
of the assets.
Thealternativeapproachistoestimatethevaluebasedonthe
earningpoweroftheassets.Tomakethisestimate,wewould
firsthavetoestimatetheexpectedcashflowsfromtheassets
andthendiscountthesecashflowsbacktothepresent,using
an appropriatediscountrate. Inthepreceding example,for
instance,ifweassumedthattheassetsinquestioncouldbe
expectedtogenerate$400millioninafter-taxcashflowsfor
15 years(aftertheterminalyear)andthecostofcapitalwas
10 percent, our estimate of the expected liquidation value
would be:
Whenvaluingequity,thereisoneadditionalstepthatneedsto
be taken. The estimated value of debt outstanding in the
terminalyearhastobesubtractedfromtheliquidationvalue
to arrive at the liquidation proceeds for equity investors.
Multiple Approach
In this approach, the value of a firm in a future year is
estimated byapplying a multipleto thefirm’s earnings or