Course 404: Putting DCF into Action Step 4--Calculate Discounted Perpetuity Value In this step, we use another formula from the last lesson: Perpetuity Value = ( CFn x (1+ g) ) / (R - g) CFn = Cash Flow in the Last Individual Year Estimated, in this case Year 10 cash flow g = Long-Term Growth Rate R = Discount Rate, or Cost of Capital, in this case cost of equity For example, we'll use use 3% as the perpetuity growth rate, which is close to the historical average growth rate of the U.S. economy. So, we'll assume that after 10 years, Charlie's Bicycles will also grow at this 3% rate. Plugging the numbers into the formula: ( \$1,284 x (1 + .03) ) / (.09 - .03) = \$22,042 million Notice that for the cash flow figure we used the undiscounted Year 10 cash flow, not the discounted \$542 million. But because we used the undiscounted amount, we still need to express the perpetuity value in present-value terms using this trusty formula: Present Value of Cash Flow in Year N = CF at Year N / (1 + R)^N Present Value of Perpetuity Value = \$22,042 million / (1 + .09)^10 = \$9,311 million Next: Step 5--Add It All Up >>
 Search Print Lesson  | Feedback Del.icio.us | digg it