CCM vs. EEM
- Thread starter noplace26
- Start date
1. CCM is basically a single-stage free cash flow model:
To get firm value:
FCFF1/(WACC-g)
If you want to derive equity value, either you subtract market value of debt from firm value, or you do:
FCFE1/(r-g)
Useful if valuing small private firms with no comparables available and stable growth is reasonable.
2. EEM
Rarely used but applicable to small firms with significant intangibles.
- Calculate required return on working capital and fixed assets (r would be given in the exam): required return = (r * working capital) + (r * fixed assets)
- Calculate “excess earnings” or residual earnings: EE = NI (normalized) - required return previously calculated
- Calculate the value of intangibles: basically a growing perpetuity with an assumed “g” and the corresponding “r” for the intangible assets: V = EE*(1+g)/(r-g)
- Sum the value of the intangibles to the book value of fixed assets and working capital. [Remember that you only calculated the required return on WC and FA to find EE, so don’t use that values to find firm value!!]
Basically different methods of valuing private companies, I hope it’s clear now.
To get firm value:
FCFF1/(WACC-g)
If you want to derive equity value, either you subtract market value of debt from firm value, or you do:
FCFE1/(r-g)
Useful if valuing small private firms with no comparables available and stable growth is reasonable.
2. EEM
Rarely used but applicable to small firms with significant intangibles.
- Calculate required return on working capital and fixed assets (r would be given in the exam): required return = (r * working capital) + (r * fixed assets)
- Calculate “excess earnings” or residual earnings: EE = NI (normalized) - required return previously calculated
- Calculate the value of intangibles: basically a growing perpetuity with an assumed “g” and the corresponding “r” for the intangible assets: V = EE*(1+g)/(r-g)
- Sum the value of the intangibles to the book value of fixed assets and working capital. [Remember that you only calculated the required return on WC and FA to find EE, so don’t use that values to find firm value!!]
Basically different methods of valuing private companies, I hope it’s clear now.
I got 205.71 M and the reason is because you have calculated EE * (1+g) and you don’t have to. At the beginning of the item set it is said “he projects the following data for 2009”, and you are in 2008. So your EE of 28.8 M is already EE1.
Hence, 28.8/(0.20-0.06) = 205.71 M
I hope it helped.
Hence, 28.8/(0.20-0.06) = 205.71 M
I hope it helped.