Discounted economic profits are used becoz of its close link to economic theory and competitive
strategy.
Economic profits help to determine whether a company is earning it cost of capital in a given year.
WACC model
It works best when company maintains a stable debt to value ratio.
debt-value ratio changes – difficult to use wacc model
Enterprise value
It is the free cash flow from operations discounted at wacc is enterprise value.
From which non equity financial claims are substracted to find cost of equity.
Cost of equity method to find enterprise value is difficult as it is difficult to find correct value
of the shares.
This model is useful for multibusiness company.
Enterprise value = summed value of individual operating units
- present value of corporate senter cost
+ value of non operating assets.
, Vale of operations = future value of DCF
FCF = company operations – reinvestment in business
FCF is the cash flow available to all investors and is independent of leverage.
FCF is DCF with WACC
WACC is the opportunity cost of funds and is required return by debt and shareholders.
Key drivers of value value= FCF/(ROIC-G)
1. return on invested capital
2. fcf
3. growth
or
operating marging
strategy.
Economic profits help to determine whether a company is earning it cost of capital in a given year.
WACC model
It works best when company maintains a stable debt to value ratio.
debt-value ratio changes – difficult to use wacc model
Enterprise value
It is the free cash flow from operations discounted at wacc is enterprise value.
From which non equity financial claims are substracted to find cost of equity.
Cost of equity method to find enterprise value is difficult as it is difficult to find correct value
of the shares.
This model is useful for multibusiness company.
Enterprise value = summed value of individual operating units
- present value of corporate senter cost
+ value of non operating assets.
, Vale of operations = future value of DCF
FCF = company operations – reinvestment in business
FCF is the cash flow available to all investors and is independent of leverage.
FCF is DCF with WACC
WACC is the opportunity cost of funds and is required return by debt and shareholders.
Key drivers of value value= FCF/(ROIC-G)
1. return on invested capital
2. fcf
3. growth
or
operating marging
