Finding the Value of the Firm
Value of the Firm = Value of the Company = Present Value (现值)= How much money ($$/￥/₩) the company would be worth if you tried to sell it today. The Value of the Firm should include
- How much money the company is worth today and
- Expected profits in the future.
- Value of the Firm = Current Profit + Expected Future Profit.
- X = Current or Expected Accounting Profit (会计利润) = Revenue - Explicit Costs
- R = Risk-Adjusted Discount Rate (风险调整贴现率) (although we hope we will make the expected accounting profit this year or in future years, there is always the possibility that we will not. No one will pay us the full expected value of the company because of this risk. So to give the buyer some protection, just in case, we remove the Risk-Adjusted Discount Rate from the total.)
- T = Number of Years from Today
The Equation for 1 Year is: