We can do a similar analysis to derive the firm value
multiples.Thevalueofafirminstablegrowthcanbewritten
as:
whereFCFF 1 istheexpectedfreecashflowtothefirmnext
year,kcisthecost ofcapital,andgnisthegrowthratein
operating income.
Dividingbothsidesbytheexpectedfreecashflowtothefirm
yields the value/FCFF multiple for a stable-growth firm.
Themultipleoffreecashflowtothefirm(FCFF)thatafirm
commandswilldependontwovariables:itscost ofcapital
anditsexpectedstablegrowthrate.Sincethefreecashflow
tothefirmistheafter-taxoperatingincomenettedagainstthe
net capital expenditures and working capital needs of the
firm,themultiplesofEBIT,after-taxEBIT,andEBITDAcan
also be estimated similarly. We will return to do this in
Chapter 9.
Thepointofthisanalysisisnottosuggestthatwegobackto
usingdiscountedcashflowvaluation,buttounderstandthe
variablesthatmaycausethesemultiplestovaryacrossfirms
in thesamesector.Ifweignorethesevariables, we might
concludethatastockwithaP/Eof 8 ischeaperthanonewith
aP/Eof 12 whenthetruereasonmaybethatthelatterhas
higherexpectedgrowth,orwemightdecidethatastockwith
aP/BVratioof0.7ischeaperthanonewithaP/BVratioof