EECS 1019 Lecture Notes - Lecture 24: Weighted Arithmetic Mean
15 Jun 2018
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EECS 1019 Lecture 24 Notes
Introduction
Dollar Cash Flows
• The ethod desried reflets the ke fators affetig a MNC’s alue i a geeral
sense.
• Domestic Model
• Before odelig a MNC’s alue, osider the aluatio of a purel doesti fir that
does not engage in any foreign transactions.
• The value (V) of a purely domestic firm in the United States is commonly specified as the
present value of its expected cash flows
• V ¼ Xn t¼1 EðCF$,t Þ ð1 þ kÞt ( ) Here E(CF$,t) denotes expected cash flows to be
received at the end of period t
• n is the number of future periods in which cash flows are received
• k represents not only the weighted average cost of capital but also the required rate of
return by investors and creditors who provide funds to the MNC.
• The dollar cash flows in period t represent funds received by the firm minus funds
needed to pay expenses or taxes or to reinvest in the firm (such as an investment to
replace old computers or machinery).
• The expected cash flows are estimated from knowledge about various existing projects
as well as other projects that will be implemented in the future.
• A fir’s deisios aout ho it should iest fuds to epad its usiness can affect its
epeted future ash flos ad therefore a affet the fir’s alue.
• Holding other factors constant, an increase in expected cash flows over time should
increase the value of a firm.
Cost of Capital
• The required rate of return (k) in the denominator of the valuation equation represents
the cost of capital (including both the cost of debt and the cost of equity) to the firm and
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