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four steps in calculating the equity value

Essentially, there are four steps in calculating the equity value of a corporation:

1. Forecasting free cash flow for several years on an individual year basis .
2. Calculating terminal value at the end of this forecast time frame.
3. Discounting 1 & 2 with the company's weighted average cost of capital .
4. Subtracting outstanding debt.

Explain the logic of each of these four steps.

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The logic behind the first step is to ascertain the actual cash flow which is expected to be received by the investor/shareholder from the operations throughout the life of the organization. The free cash flow is the actual cash that is received by the owner in lieu of his investment in the company.

The logic behind the second step is to identify the residual value ...

Solution Summary

Essentially, there are four steps in calculating the equity value of a corporation:

1. Forecasting free cash flow for several years on an individual year basis .
2. Calculating terminal value at the end of this forecast time frame.
3. Discounting 1 & 2 with the company's weighted average cost of capital .
4. Subtracting outstanding debt.

Explain the logic of each of these four steps.

$2.19