Page 46 - FINAL CFA II SLIDES JUNE 2019 DAY 8
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LOS 33.f: Calculate the value of a READING 33: PRIVATE COMPANYVALUATION
private company using free cash flow,
capitalized cash flow, and/or excess
earnings methods. MODULE 33.2: INCOME-BASED VALUATION
The Free Cash Flow Method – see prior work!
The Capitalized Cash Flow (CCF) (Income) Method
A single measure of economic benefit is divided by a capitalization rate (where the capitalization rate = WACC – g or r – g).
Suitable when no comparables are available, projections are quite uncertain, and stable growth is a reasonable assumption.
If growth is non-constant, CCM should be avoided in favor of the FCF.
EXAMPLE: Given the following figures, calculate the value of the firm and equity using the CCM.
Capitalization rate: WACC – g = 11% (15% − 4%).
WACC will be greater when more (relatively expensive) equity and
less debt are used, resulting in lower estimates of firm and equity
values.
value of firm = ($12,100,000) / (0.15 − 0.04) = $110,000,000
value of equity = $110,000,000 − $4,000,000 = $106,000,000
