How do we value a company?
- The value of an asset is a function of:
- The cash flows generated by the asset, and
- The appropriate discount rate applied to these cash flows
PV = FV / (1+r) ^n
where PV is present value, FV is future value and r is the discount rate
- Hence a firm can be valued by :
- Calculating the present value of the cash flows generated by the firm’s real assets
- Calculating the present value of the firm’s individual securities (i.e. equity and debt securities)
V = D + E
where V is value of firm, D is value of debt and E is equity