willbeginwith afirmvaluationmodel,where wediscount
cashflowstothefirmatthecostofcapital,andexaminethe
determinants of each multiple.
Determinants of Value Multiples
Withequity multiples,weshowedthatthedeterminants of
multiples don’t change as we go from stable-growth to
two-stage models, though there are more estimation
requirementswiththelatter.Sincestable-growthmodelsare
mucheasiertoworkwiththanhigh-growthmodels,wewill
derive the determinants of value multiples using a
stable-growth firm valuation model:
Drawingon ourearlierdiscussionoffreecash flowto the
firm(inChapter3),thefreecashflowtothefirm(FCFF)can
be written in terms of after-tax operating income and the
reinvestment rate:
Usinggasourmeasureoftheexpectedgrowthrateandtas
the tax rate, we can now easily derive the equations for
enterprisevalueasmultiplesofnextyear’soperatingincome
(EBIT) and after-tax operating income [EBIT(1 − Tax rate)].