Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 20

Moore Heel is a shoe manufacturing company. Moore has hired you to value the company based on the discounted cash flow method. You have determined that the present value of the company’s cash flows is $400,000, marketable securities total $150,000, and the market value of debt is $250,000. What is the value of the firm?

Step 1 of 3

Value of the firm by discounted cash flow method (DCF)

Basically, the value of the firm depends upon the value of the debt and the value of the equity, if we add value of the debt to the value of the equity we get value of the firm. Under the discounted cash flow method (DCF) attempt is made to value the investment today and by prediction what is the value of the investment tomorrow or future. It means future cash flow is predicted, by this investor make a plan for the future to make some changes in the businesses.