Corporate Finance Professional Certificate MOOC
Course 2, The Free Cash Flow Method for Firm Valuation
Module 1 Notes, Enterprise Discounted Cash Flow (DCF)
Model
Book Values of Assets
The values of all assets owned at their historical cost minus accumulated depreciation..
Perpetuity Formula
!" =
PV = Present Value
C = Cash Flow
r = Rate
%
&
Market Value
The amount for which something can be sold on the market- based on future cash flows
Liquidation
The selling off of assets, especially when the book value of assets is higher than the market value of
the firm
Cash flow to equity method
An approach to equity valuation based on computing cash flows that equity holders receive each
period, after all payments to debt holders have been considered, and then discounting these cash
flows
Enterprise Discounted Cash Flow (DCF) Model
An alternative approach to firm valuation which starts by first computing the value of the assets of
the firm – not the value of equity – by discounting the free cash flows. To find the value of equity we
subtract the value of debt from the asset value.
Free Cash Flows (FCF)
Cash flows which the operating assets of a firm generate.
Operating Assets
Assets that a firm uses for its core businesses.
Value of Equity
" '()*+, = " -.. 0112+1 + " 456 − -.. 0112+1 − "(92:+)
V = Value
Op. Assets = Operating Assets
Non-Op. Assets = Non-Operating Assets