Course 309: Steady-State Value
Determining Steady-State Value
In this course
1 Introduction
2 Determining Steady-State Value
3 The Value of Growth

To determine a company's steady-state value, we start with free cash flow, or the cash left over after all of a company's expenses have been paid. (Find a company's free cash flow figure on its Quicktake Report.) It also represents the amount of money a company could distribute to shareholders each year and still keep the business running. Once we have determined a company's free cash flow, we assume that the company will generate that same amount of cash every year forever. Next, we want to find out what that future stream of cash is worth today. To determine the present value of the future cash, we need to take the free cash flow and divide it by a discount rate. Steady-state value = free cash flow / discount rate A discount rate is an interest rate used to determine the present value of future cash flows. In the following examples, we'll use a discount rate of 10%, which is loosely based on the yield of the 30-year Treasury bond. The yield at the end of 1999 was about 6%. Then we'll add an even 4 percentage points, since we expect a company's cash to appreciate in value more quickly than a bond's value would. That gives us 10%. Let's consider Ford F as an example. The auto giant's free cash flow was $14 billion in 1998, so assume Ford will be able to continue to generate $14 billion in free cash flow each year--no more, no less. Then the business would be worth $14 billion divided by the 10% discount rate. The steady-state value ends up being $140 billion (that's $14 billion/0.10).

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