Corporate Value Creation: An Operations Framework for Nonfinancial Managers

CHAPTER FOUR

Introduction to Valuation Models

CHAPTER 4 TAKEAWAYS

• The valuation model for an enterprise can consist of a series of cash flows or a combination of a forecast series followed by a post-forecast series of cash flows and is modeled by the expression

  

• The present value of forecast period cash flows is valued by

  

  This in expanded form becomes

  

• Post-forecast-period cash flows can be valued a number of ways. The model selected depends on the assumptions made about the post-forecast cash flows.
• The five models together with the associated assumptions are:

(1) Perpetual Fixed Model (PXM)

This model assumes a fixed (constant) stream of cash flow that continues forever. It's hard to think of a company's post-forecast-period cash flows that would suit this model and therefore it's seldom if ever used.

(2) Finite Fixed Model (FXM)

Unlike the perpetual fixed model this model values a fixed cash flow stream for a finite period of NX years. Again it's unlikely to be a realistic prototype ...