Calculating Equity Value

1. Calculating Equity Value

We now put all of the calculations together to calculate the firm's equity value.

2. Present Value

The firm's equity value is equal to the sum of (a) the present value of the FCFE during the projection period and (b) the present value of the terminal value. We now discuss how to calculate these two components in R.

3. PV of FCFE in R

To implementing the present value of free cash flows during the projection period, we first setup our example. Suppose you are valuing a firm with FCFE of $100 million each year for the first 5 years. We then create a variable for the number of discount periods. Here, we use the seq() command to generate the number of years to discount - 1, 2, 3, 4, and 5. We then calculate the Present Value Factor, which is an amount we multiply to the cash flow to get to the Present Value. The PV Factor is calculated as 1 over 1 plus the cost of equity raised to the number of discount periods. Finally, the PV of the FCFE during years 1 to 5 is the sum of amounts in the PV column.

4. PV of Terminal Value in R

For the terminal value, we can continue from our example in the last video. There, we had a Terminal Value in Year 5 of $858 million. We can use the same cost of equity of 15% to discount the Terminal Value 5 years. This yields a present value of $427 million.

5. Equity Value and Equity Value Per Share

We now add pv_fcfe and pv_tv to get to an equity value of $762 million for our firm. We are not done though. When you look up a quote of a stock, the quotes are in price per share. To transform the equity value into a per share number, we have to divide the equity value by the firm's shares outstanding. Suppose that the firm has 15 million shares outstanding, then the equity value per share is equal to $762 million divided by 15 million shares or $50.80 per share.

6. Let's practice!

That was quite a bit of material. Now it's time to practice.

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This exercise is part of the course

Equity Valuation in R

IntermediateSkill Level

4.9+

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Many individuals and institutions invest in equities. To do so effectively, the investor must have a solid understanding of how the value of the equity compares to the stock price. In this course, we focus on fundamental concepts of equity valuation. We begin with a discussion of time value of money and then move on to the first of two discounted cash flow methods we will discuss - the free cash flow to equity valuation model.

Exercise 1: Course Intro and Fundamental Valuation Exercise 2: Time Value of Money Exercise 3: Difference Between Valuing Enterprise and Equity Cash Flows Exercise 4: The Free Cash Flow to Equity Model Exercise 5: Calculating Operating Profit Exercise 6: Calculate Free Cash Flow to Equity Exercise 7: Calculating Terminal Value Exercise 8: Calculating Equity Value

Current Exercise

Exercise 9: Calculating Present Value of Free Cash Flow to Equity Exercise 10: Calculate Present Value of Terminal Value Exercise 11: Calculate Equity Value

One of the critical components of free cash flow to equity valuation is using reliable projections. In the first part of this chapter, we will discuss ways to analyze the projections to help us identify the right questions to ask. In the second part of this chapter, we will go through the second of our discounted cash flow models - the dividend discount model. In this approach, we discount expected dividends instead of free cash flows.

Exercise 1: Analyzing the Projections Exercise 2: Analyze Revenue Trends - Bar Chart Exercise 3: Analyze Revenue Trends - Regression Exercise 4: Perpetuity Growth Rate Exercise 5: Calculate Retention Ratio Exercise 6: Perpetuity Growth Rate Calculation Exercise 7: Dividend Discount Model Exercise 8: Valuing Preferred Stock Exercise 9: Valuation Assuming No Dividends For First Few Years Exercise 10: Valuation Assuming 2-Stages of Dividends

To be able to discount cash flows, we need a discount rate. For the free cash flow to equity and dividend discount model, the cost of equity is the appropriate discount rate. In this chapter, we will discuss how each of the components of the cost of equity are calculated.

Exercise 1: What is a discount rate?Exercise 2: Risk and Return Exercise 3: Calculating Returns Exercise 4: Estimating Beta Exercise 5: Unlevering Betas Exercise 6: Hamada vs. Fernandez Formula Exercise 7: Beta Unlevering Exercise Exercise 8: Beta Relevering Exercise Exercise 9: Risk-Free Rate and Equity Risk Premium Exercise 10: Obtain Risk-Free Rate Data Exercise 11: Calculate Historical Equity Risk Premium Exercise 12: Calculate the Cost of Equity

Relative valuation allows us to use the valuation of comparable companies to infer the value of our subject firm. In this chapter, we discuss how to identify comparable companies and how to calculate valuation multiples. We also show how to analyze the determinants of multiples.

Exercise 1: Relative Valuation Exercise 2: Identifying Comparable Firms Exercise 3: Valuation Multiples Exercise 4: Calculating Valuation Multiples Exercise 5: Calculating the Relevant Multiple Exercise 6: Implied Price Exercise 7: Analyzing Determinants of Multiples Exercise 8: Calculate ROE and P/B Exercise 9: Plot P/B vs. ROE Exercise 10: Strength of Relationship Exercise 11: Implied Price Using Regression Exercise 12: Difference in Implied Values

This chapter combines the lessons from Chapters 1 to 4 in a series of exercises. You will be asked to inspect the data and to value the firm using discounted cash flow and relative valuation approaches. At the end, you will combine the results in a summary table.

Exercise 1: Fundamental Valuation: Analyzing Projections Exercise 2: Visually Inspecting the Data Exercise 3: Using Regression to Test the Projections Exercise 4: Fundamental Valuation: Implementation Exercise 5: Cost of Equity Exercise 6: Calculate Value During Projection Period Exercise 7: Calculate the Terminal Value Exercise 8: Equity Value Per Free Cash Flow to Equity Model Exercise 9: Equity Value per Dividend Discount Model Exercise 10: Relative Valuation Exercise 11: Equity Value Per Price-to-Earnings Multiples Exercise 12: Combine valuation into a summary table Exercise 13: Congratulations!