4-5 VALUING A BUSINESS Example Given cash flows for Concatenator Manufacturing Division, calculate PV of near- term cash flows, PV (horizon value), and total value of firm; r = 10% and g = 6% 1 2 3 5 6 7 8 9 10 Asset value 10.00 11.20 12.54 14.05 15.31 16.69 18.19 19.29 20.44 21.67 Earnings 1.20 1.34 1.51 1.69 1.84 2.00 2.18 2.31 2.45 2.60 Net investment 1.20 1.34 1.51 1.26 1.38 1.50 1.09 1.16 1.23 1.30 Free cash flow (FCF) 0.00 0.00 0.00 0.42 0.46 0.50 1.09 1.16 1.23 1.30 Return on equity (ROE) 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 Asset growth rate 0.12 0.12 0.12 0.09 0.09 0.09 0.06 0.06 0.06 Earnings growth rate 0.12 0.12 0.12 0.09 0.09 0.09 0.06 0.06 0.06 4-30