Corporate Valuation

Chapter 10A Steady State Cash Flow Model

10.1 VALUE AS A FUNCTION OF DISCOUNTED FUTURE RESULTS

In this chapter, we will discuss the three models based on the principle that corporate (and equity value) is a function of the discounted expected future results of a company:

• The first one is based on the formula of capitalization of normalized results. The crucial aspect of this model in the context of company valuation is the assumption that value is linearly dependent on long-term results.
• The second is a growth model in real terms. The crucial elements for the valuation are the factors on which growth is based—that is, the amount of investment necessary to sustain the company's growth and future profitability.
• Third, the multi-stage valuation model, which is based on the concept of limited periods of growth.

The discussion across this and the next chapter will follow this outline:

• Use of a methodology, the Adjusted Present Value (APV), that separately value the unlevered assets of a company and its tax shields distinct
• Proof of the equivalence of the first approach (APV) with the discounted FCFO model and the discounted FCFE model respectively

The equivalence of the results obtained through the different procedures will help us better understand the assumptions implied by the different models.

10.2 CAPITALIZATION OF A NORMALIZED MONETARY FLOW

Under the steady-state scenario, it is assumed that the company can sustain its average cash flow in the long-term through average ...