Business Valuation 617the first forecasted year (2001) is discounted one-half year, rather than one
complete year, to the valuation date of December 31, 2000.
The residual value is based on the expected invested capital net cash f low
in the last year of the projection (2005) of $4.533 million. Victoria estimates
ACME’slong-term sustainable earnings growth rate at 5% annually. Accord-
ingly, the cash f low for 2006 is estimated at $4.760 million ($4.533 million ×
1.05). The multiple Victoria applies for the residual year is 12. The calculation
for the multiple is presented in Exhibit 18.11. ACME’s residual value at De-
cember 31, 2005, is estimated as $57.1 million.
The present values of the five years of cash f lows are added together
plus the present value of the residual value. These items represent the antici-
pated future benefits to all capital holders at December 31, 2000. The sum of
the present values represents the market value of the total invested capital
(MVIC) of $42.1 million. ACME’s interest bearing debt of$10.4 million is
subtracted resulting in $31.7 million for the value of ACME’s common stock
EXHIBIT 18.11 ACME Manufacturing Inc.: DCF method of
valuation as of December 31, 2000.
(Exhibit 18.6)
Forecast Projected Present
Year Cash Flows WACC Value
2001 $1,921,000 13.3% $ 1,804,731
2002 2,565,000 13.3% 2,126,878
2003 3,367,000 13.3% 2,464,157
2004 3,917,000 13.3% 2,530,165
2005 4,533,000 13.3% 2,584,349
Residual value (see below) 13.3% 30,591,919
Value of invested capital 42,102,198
Less: debt capital (10,411,554)
Value of equity $31,690,644
Value of equity (rounded) $31,700,000Residual Value at December 31, 2005
2005 Projected cash f low $4,533,000
Estimated sustainable growth rate 1.05
2006 Projected cash f low 4,759,650
Price multiple
WACC (discount rate) 13.3%
Less: Sustainable growth rate −5.0%
Capitalization rate 8.3%
Multiple (inverse of capitalization rate) 12
Residual value at December 31, 2005 $57,115,800
Present value of residual value $30,591,919