preceding chapter, we present the general version of the
model. Webegin by outlining theprocess for valuing the
operatingassetsofthefirmandcontinuebyexamininghow
to getfrom the value of operating assets to the value of
equity.
Valuing Operating Assets
Thevalueofthefirm,inthemostgeneralcase,canbewritten
as the present value of expected free cash flows to the firm.
where
FCFFt= Free cash flow to firm in yeart
WACC = Weighted average cost of capital
If the firm reaches steady state after n years and starts
growingatastablegrowthrategnafterthat,thevalueofthe
firm can be written as:
Notethatthefreecashflowtothefirmiscomputedbasedon
theoperatingincomeofthefirmandhowmuchisreinvested
to keep that operating income growing: