One special case of asset-based valuation is liquidation
valuation,wherewevalueassetsbased onthepresumption
thattheyhavetobesoldnow.Intheory,thisshouldbeequal
to the value obtained from DCF valuations of individual
assets, but the urgency associated with liquidating assets
quicklymayresultinadiscountonthevalue.Howlargethe
discount will be will depend on the number of potential
buyersfortheassets,theassetcharacteristics,andthestateof
the economy.
Equity Valuation versus Firm Valuation
There are two ways in which we can approach DCF
valuation.Thefirstistovaluetheentirebusiness,withboth
assetsinplaceandgrowthassets;thisisoftentermedfirmor
enterprisevaluation.(SeeFigure1.2.)Thecashflowsbefore
debtpaymentsand afterreinvestmentneeds arecalledfree
cashflowstothefirm,andthediscountratethatreflectsthe
composite cost of financing from all sources of capital is
called thecost of capital.
FIGURE 1.2Firm Valuation